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Blockchain has real potential to reduce 'old school' procure to pay transactions

IBM’s new white paper “Making Blockchain Ready for Business”, in which they conducted a roundtable with a number of executives provides some important clues as to how the technology will unfold in the next few years.   There is increasing evidence that blockchain (or Distributed Ledger Technology) is not a standalone solution, but will emerge more as an open source utility, much like the Internet.  In that regard, it is likely that industry-specific applications will begin to emerge, and many of them will be around linking the physical supply chain and the financial supply chain.

The latter element of course refers to the complex system of business to business transactions that exists today in most organizational supply chains.  A recent white paper put out by JP Morgan suggests that the current set of buying channels that exists in most organizational supply chains is a dinosaur – literally a mammoth in this case!  This study suggests that for business-to-business (B2B) transactions, despite the new developments in payments,  businesses in the United States still largely rely on checks for paying their suppliers. A commonly cited reason for this is that “checks work”.  This is based on a survey of 412 respondents from the Association for Financial Professionals (corporate practitioners).  Amazingly, although the percentage of payments  is going down (see trend line in Figure 1), over 50% of organizations still write checks for their B2B transactions!  Well, of course, most small companies and entrepreneurs are going to write checks, (I rationalized to myself).  Wrong again!  Organizations making 1000 or more B2B payments per month are making 54% of their payments by check (see Figure 2)!

Figure 1

Figure 2

Figure 3

The article goes on to share even more stunning news.  (Mind you – I’m a supply chain guy, so this news was stunning to me, but maybe not to the reader…) . Only 5%% of payments are made by procurement cards – and 34% are made by ACH Credits! This is pretty incredible – as I thought for sure that organizations are moving more towards electronic payments.  The news here, in my mind, is that there is a huge upside for blockchain to come in and disrupt the whole system – and perhaps banish paper checks forever!

IBM is certainly leading the pack in terms of getting traction, especially after the news this week that they were selected to build a new blockchain-based international trading system for a consortium of global banks, a major win for the tech giant in the race to sell blockchain to Wall Street.  The banks involved will include Deutsche Bank, HSBC, KBC, Natixis, Rabobank, Société Générale and UniCredit.  But remember, this is primarily the B2B financial network only – that is, inter-bank transfers for major financial transactions.  This is a comparatively small piece of the total financial system pie.  In total, there are about eight different players competing to become the blockchain utility of choice, of which IBM is one.

Practitioners are IBM’s roundtable noted that one of the biggest ways that blockchain will emerge is in global trade.  A practitioner noted that “For domestic payments, by and large, DLT is not vital, but as you move cross-border and more players enter the chain, there could be more value. It’s also important to remember what we hear from blockchain initiatives already under way in payments, that the cost savings are not coming in the processing per se but in the back office operational costs, the reconciliations, the investigations et cetera.”

There is also a big impact for blockchain technology to mitigate risk in the supply chain, according to one participant, and impact counterfeiting.

“Obviously global trade has lots of physical documents, and wet signatures being couriered around the world, and this generates many inefficiencies from fraud to documents being directed to the wrong place or taking a long time to get there. In our pilot we were able to reduce from 10 days to four hours the time it took to move all of the trade documentation from one customer to the other. That’s definitely a huge saving of time – and avoids many of the risk.”

Blockchain is in my mind one of those areas that supply chain practitioners need to watch carefully.  This one is going to make a huge difference – more than IoT, serialization, sensors, or any other emerging technology.  Hold on tight!