Only a few months ago, blockchain was considered a bit geeky and known mainly in crypto-hacking and techno-banking circles. Critics said it was a technology in search of use cases. While it’s hardly widely adopted, blockchain certainly found its feet in 2016, and we’re now seeing banks experimenting with a variety of proof-of-concept use cases around international payments, e-identity, and smart contracts. But now, blockchain has a big new target in its sights: digitizing the financial supply chain. And it has the potential to save you millions.
Before I explain how, let’s do an abridged history lesson just for context. Letters of credit, the bedrock of supplier trade finance, have been in existence for more than 3,000 years and date back to ancient Egypt. The whole point of a letter of credit was – and still is – to provide certainty of payment to the seller. But times have changed significantly since goods went off to market on the back of a camel.
As I type this, there are more than $7 trillion of payables and receivables on companies’ ledgers worldwide. The globalization of buyers and sellers, combined with promotional trading peaks such as Black Friday (which generated $5.27 billion in just one day in the U.S. in 2016), are making it increasingly costly to process letters of credit. It’s time the financial supply chain went digital. And blockchain makes that possible.
Processing letters of credit today is largely manual and expensive. And as fraud becomes more sophisticated and prevalent, it’s also becoming riskier. (The audacious €1 billion letter of credit scam back in 2008 would no doubt be far more sophisticated by today’s standards.) As the financial supply chain moves from purchase order, to material ordered, to shipping, to invoice dispatch, to invoice approval, multiple parties are involved – including a host of banks.
Blockchain provides visibility across the entire financial supply chain from the first supplier through to the end customer. This not only reduces risk, it also amplifies fiscal liquidity across the chain for all participants, including small companies, banks, and non-banks – so they can all participate safely in financing the chain with certainty.
I mentioned earlier that blockchain could save you millions. That’s because all participants in a blockchain network have a complete copy of the shared ledger where all transactions are recorded. This includes details of where the money should be sent and provides banks with an opportunity to increase the straight-through processing rate, saving both time and money. One UK clearing bank I spoke with recently believes the cost of redressing instructions for the two to three percent that require exception handling equates to the same cost of processing the remaining 97-98%. In my view, it’s an area that’s screaming out to be digitized.
It’s time to give this expensive, risky, and time-consuming process a makeover and add greater security and transparency to the financial supply chain. Blockchain has the potential to improve the way the entire financial supply chain is funded and traded globally, bringing a new wave of economic benefits.
Want to learn more about blockchain and how it works? Read Breaking Down The Complexity Of Blockchain: An Everyday Use-Case.