Blockchain’s transformational impact on Accounts Payable

It seems that blockchain will have an impact everywhere. That is if you believe the hype. But is it hype or are the predictions of the near future just as insightful as those of the early 1990s that described how the internet would change many aspects of our lives both at home and at work?

Why the hype?

The reason that blockchain is so powerful is that it creates an indisputable record of transactions. Protected by powerful encryption, the provenance of the information stored in the shared ledger of the blockchain is guaranteed to be accurate. In the case of cryptocurrencies like bitcoin, this provides assurance in a way that there is no need for a bank to act as the trusted third party or arbiter of who owns what. If this principle is applied to purchase to pay, it could strip out layers of bureaucracy from supply chains and dramatically reduce the cost of doing business.

Wherever you turn there’s a new application for blockchain technology. It is already disrupting parts of the financial services industry and some banks have even issued their own cryptocurrency accounts apparently in direct competition to their own traditional core business, to speed up back office settlement systems. But the impact is predicted by many to go much further than financial services and I believe it will fundamentally alter the way we do business with each other – not only the way we use money.

As revolutionary as online shopping

Take a simple purchasing transaction and its associated documents: a purchase order, a delivery note and an invoice. When it comes to paying a supplier, typically, an administrator in the buying organisation checks that the supplier’s invoice matches a corresponding Purchase Order and the delivery details. This is important because there maybe discrepancies – an over or under delivery or a price variance for example. But suppose we performed purchasing transactions using a blockchain platform. There would be no need to check that the invoice matches because if the records – the order, the delivery confirmation etc. – are stored in the blockchain, the provenance, authenticity and accuracy of these records are guaranteed. If that is the case, there is no need for an invoice. Payment could be made as a logical step following delivery as long as the delivery details match the P.O. details. 

It may seem farfetched – even fanciful – to imagine that by using blockchain technology business could dispense with a fundamental business document – the invoice – but internet shopping also seemed unfathomable in the early 1990s. Let me remind you of what the world was like then. The internet was a new type of robust network. It was used for communication. Email was the killer app. Academics used the world wide web to share information. Its potential to reach into the home was recognised early but it was communication and content consumption that was seen as its primary purpose. Online shopping was considered inappropriate – why would anyone buy something via the internet when they can buy it from a store? And in any case, there were practical, contractual and legal obstacles. Old world paper processes such as signatures were deemed essential and there were of course security concerns. Yet despite the cynicism and the mountain of conventional thinking that had to be overcome, in less than a decade e-commerce had taken over the world.

The future of finance with blockchain

The scenario with e-commerce described above is the stagewhere we are with blockchain. The killer app – bitcoin – proved that blockchain is robust and reliable and more and more applications are emerging all the time. Most are derivatives of the concept of cryptocurrency but others, such as those that relate to supply chain, are quite original. The concept of the “smart contract”, the conditions placed within a transactional blockchain that automatically initiate actions as a consequence of others could revolutionise some business processes. These new applications of the technology can be hard to understand and they seem to tip traditional business process on their head. As they do so, new opportunities emerge. New ways of doing things become visible that would previously never have been thought of.

Consider for example the impact of a single, transparent shared ledger of B2B transactions across a supply chain. Using modern data mining, artificial intelligence (AI) and predictive analytics, unparalleled value could be extracted from that information. But that is only the tip of the iceberg – why limit this to a single supply chain of one buyer and its many buyers. It could extend across a whole industry or even a whole economy. Real-time automated audits of business transactions could make tax collection more efficient and more effective.

But blockchain does not only have the potential to create big changes at a macro level – it will also impact at the coal face. Consider for example how much more effective the accounts payable function could become if it were relieved of the routine manual matching process required today to approve payments by a smart contract. Greater focus could be applied to reporting and analysis. Rather than simply approving payment, questions could be asked about the timing of payment. If payment approval is made immediately as part of a blockchain managed smart contract, why not pay immediately and claim a discount from the supplier? Indeed, the smart contract could be managed to become part a new strategic financial operations team, managing DPO and cash flow and helping to mitigate supply chain disruption by collaborating more closely with suppliers on payment terms.

What is happening today

It is difficult to underestimate the effects that these new technologies will have. They have the real and immediate potential to transform the finance function in a fundamental way, creating greater transparency and predictability. 

Is all of this possible today? Perhaps not. Invoices remain a legal requirement in most economies; however, the opportunity is a real one and it will be possible in the foreseeable future. But there is something that can happen today. Applying blockchain principles to purchase to pay allows the accounts payable function to have a much more strategic dialogue with the wider finance and supply chain communities about how they can play a more central role and move away from the back office to the forefront of the business.

It is a mistake to think that a “watching brief” is the action for today. To “keep a close eye on blockchain” isn’t an action in response to the opportunity, it’s an excuse for no action. Many of the purchase to pay applications of blockchain are possible now and indeed many organisations are preparing specific plans to take advantage of the opportunities at hand. All finance functions, all CFOs should be doing the same.