Blockchain and digital invoice financing – what’s missing?
What is the most resistant parasite? Bacteria? A virus? An intestinal worm? An idea. Resilientâ¦ very contagious. Once an idea takes hold of the brain, it is almost impossible to eradicate it.
– “Creation “(2010)
Similar to an idea from the movie “Inception”, the blockchain has been imprinted in our brains as the solution for just about everything. But recently, a number of articles have taken a negative perspective on blockchain.
For my part, I never speak of technology for the sake of technology. But let’s not throw the baby out with the bathwater. Distributed ledger technology really started to develop only about 36 months ago. Considering that Amazon still only sold books online after its first two years, why does blockchain have to change the world so quickly?
There is no shortage of vendors developing invoice ledgers using distributed ledger technology to provide a level of confidence that an invoice uploaded to their platforms is not fraudulent or has been double funded. The idea is that the blockchain can provide both a ledger for invoice master data and a dynamic database with invoice status updates to promote third-party funding. It’s about using technology to reduce the risks associated with invoice financing.
Below is a sample of some providers who consider themselves to be a provider of managed infrastructure services to facilitate invoice financing:
- Seat – is currently developing a blockchain-based accounts receivable exchange network for supply chain finance
- Trade finance market – provides a solution called Invoice Check based on the Ethereum blockchain which he says allows consortium members on multiple continents to cooperate with each other – while ensuring the confidentiality and integrity of data
- INVIOU – an inter-network financial records ledger based on distributed ledger technology. The seller claims that the registry enables financial institutions to provide secure and simple open account financing.fraud and friction.
- Bumo – a Chinese blockchain provider with a supply chain finance platform built on the BUMO infrastructure called Yinuo Finance, which currently focuses on accounts receivable finance for SMEs. Yinuo claims more than 100 key companies, 700 suppliers and 14 banks on board, and aggregate value of financing assets exceeds $ 1.5 billion
Can blockchain really reduce the risks of bill financing?
In a recent article I did on Bill Funding, I discussed the three stages where bills can be funded. Of the three, financing at invoice submission carries by far the highest risk.
No one is claiming that blockchain technology isn’t solid, with data encryption, smart contracts, etc. all built in. It’s not in technology that things go wrong. Even in the case of bitcoin, the technology works, but the abstraction principle and the infrastructure around bitcoin to ensure both buy and sell transactions are where fraud and bad actors have played out. , and the transaction costs have been considerable.
In the past, I have argued that DLT could be a great way to improve state-by-state implementations of the UCC privilege registry and move to a single national digital registry. But again, it’s not about technology.
There are many issues with financing invoices beyond just putting information on a blockchain. What are you actually funding? Any fintech can download a hashed encrypted invoice at the source. Beyond verifying that the invoice is not fraudulent or double-funded, you are wondering about your privilege sources.
And even more importantly, what about the dilution? Do you expect that just because this invoice was uploaded and sent to your platform, investors will fund it regardless of buyer’s payment risk and dilution risk? Do you really expect buyers to sign contracts that say they’ll foot the bill? This leads to all kinds of accounting problems. Additionally, do business laws recognize registers?
The goal of becoming the network infrastructure layer for global bill financing, built using blockchain to control and manage risk, overlooks that this is not just a technology issue. If it were, it might not be small business financing shortfalls.
David Gustin leads a research and advisory practice aimed at helping financial institutions, vendors, and businesses understand the intersection of trade credit, payments, and the financial supply chain. This post was writes while David was working on a special project with The Interface Financial Group. He can be reached on dgustin (at) globalbanking.com