Blockchain technology continues to make quite a lot of progress with many business implementations in supply chain, payment, digital asset, and identity management. This is largely due to B2B open source platforms like Ethereum or Hyperledger Fabric that are becoming easier to use and more mature. When it comes to the order-to-cash arena, we have previously outlined some of the benefits of blockchain, especially as it pertains to electronic document distribution. This blog post addresses the evolving global landscape for the future of blockchain and its impact on B2B transactions involving purchase orders, invoices, and payments (order-to-cash/procure-to-pay), and the role that a smart contract plays in facilitating those processes.
Blockchain Applications in O2C and P2P
One of the main implementations of blockchain in order-to-cash (O2C) and procure-to-pay (P2P) is to replace a purchase order and associated invoices with a smart contract that fully automates the transaction and streamlines the payment. Contracts are what drive and define business and smart contracts, mediated by blockchain technology, have become the most modern manifestation of these contractual agreements. Not only that, but smart contracts are coded in a way that means they can be set to run as self-contained programs – delivering on contractual obligations when the necessary conditions are met.
Taking a step back, to refresh our understanding of the blockchain technology on which these smart contracts run, a blockchain is a digital distributed ledger that records asset-related events in an immutable, encrypted series of blocks. These blocks are connected, in the eponymous block-chain, to provide an indelible history on transactions on that blockchain, for all to see. As a result, blockchain technology can offer more robust validation than a typical banking transfer. Additionally, all parties have transparent access to the information because they don’t rely on a centralised authority.
In the B2B world, dedicated blockchain platforms and details of transactions are securely stored and are accessible only to the authorised parties (buyer and seller). One of the main advantages is to increase trust, thereby reducing collection disputes – leading to greater opportunities for automation. When implementing blockchain for B2B transactions, the benefits are driven by this strong transactional audit trail, with the goal of reducing fraud and cyberattacks while streamlining, accelerating and automating transactional processes.
Smart contracts will have a wide-ranging impact on both O2C and P2P cycles. When purchasing an asset, a business can set up a smart contract that contains all the terms, including what needs to be delivered, how and when, and on what payment terms. Because terms are coded in a computer program, the payment execution can be fully automated, removing a lot of transactions and manual interactions. With access to an associated digital wallet, it also would be possible to automate the payment. Alternatively, payment can be managed by a centralised marketplace, such as Corcentric, through an integration with a payment provider, or associated financial systems.
Blockchain in the Supply Chain
One possible extension of blockchain technology, in the O2C cycle, is to embed supply chain financial terms directly into smart contracts, providing additional value to buyers and sellers. The capability to select a payment option that is part of the smart contract would streamline the use of dynamic discounting and factoring, enabling access to cash from financial institutions when needed. COVID-19 has highlighted the relevance of this type of financing to support payments where cash flow challenges occur.
Application of blockchain technology to delivery automation offers an avenue to lower dispute management, through integration with the growing population of IoT communicating devices. There are many applications where IoT can help. For example, transporting food can be associated with terms of temperature and duration; transporting fragile equipment can be associated with vibrational measurements. We can also track the origin of goods to prevent fraud. Payment terms, including discount, can be conditioned to not only the delivery time, but also the condition of transportation.
Rethinking how payment terms are delivered and tracked will complement the standard supply chain and transportation information integration. Blockchain has the potential to provide even further value, with transparent access to information about the delivery, combined with associated cost, duty and tax calculations, to reduce disputes and automatically trigger invoice payments.
Automated Payments Move into the Future
On the payments front, there are many opportunities that will arise as B2B e-payments become more mainstream. For example, smart contracts can streamline payments by automating approvals. Although in its infancy, cross-border interoperable blockchains could lead to increased international and cross-sectoral coordination. With such expanding usage, this application could ultimately be used to facilitate payments.
Regulated automated payment using blockchain is also moving forward. A good example is Singapore National Payment System’s Project Ubin, which is now ready to be connected to commercial applications. While the US and Europe are lagging behind, there is no doubt that they will have to move faster once other countries start attracting international financial flows. And various solutions providers, such as Corcentric, are already mapping efficient e-payment systems that utilise blockchain technology.
One of the current challenges is the multiplicity of technologies and the lack of standardisation. Most business platforms utilise private blockchain networks to preserve the confidentiality of transactions; however, this privacy limits the use of the network because it requires a consortium of companies to agree on the terms.
Open Source Business Platforms for B2B Transactions
Once we solve the current limitations on interoperability and cost, because of the expensive computation required to maintain security, public blockchain networks will become mainstream. There are currently two leading open source business platforms to manage B2B transactions with smart contracts. Preference for either platform is usually down to the benefits of the network being public or private. These two platforms are:
- Ethereum, for public networks: Ethereum 2.0 is expected to launch in August 2020 and will replace the slow and expensive process of mining by a much more efficient proof of stake mechanism, with sharding capabilities, making the network simpler, scalable, faster, and cheaper. This will be a huge step towards broader adoption of public networks for B2B transactions.
- Hyperledger Fabric, for private networks: As the de facto standard to build business blockchain applications, Hyperledger Fabric is very flexible and allows any company to build and implement any type of use case. Mainly used to build proprietary or permission-based networks, this platform has many companion tools to facilitate the management of network communities. It’s moving toward better interoperability that includes capability to leverage public networks, including Ethereum.
What Can We Expect in the Coming Years?
It is still difficult to select the proper architecture and onboard a critical mass of buyers and sellers to connect everything together, including purchase orders, invoices, receipts, and payments. However, as soon as efficient permissionless (or public) blockchains like Ethereum achieve interoperability with business blockchain networks managing supply chain, B2B transactions, contracts and payments, we should see O2C transactions moving from being just digitised into being secured and automated via blockchain technology.
As described in this blog, blockchain will certainly offer a way to both streamline and enrich transactional processes, providing accelerated value to buyers and sellers. Corcentric is already a leader among the marketplaces that are able to connect buyers and sellers to manage B2B transactions and provide payment capabilities with supply chain finance. Thanks to its Business Innovation Lab, Corcentric has an approach of partnering with early adopters to work on these advances and will continue to explore the value of blockchain technology for the O2C and P2P space.
To learn more about how Corcentric can help you to innovate your O2C and P2P processes to better compete in today’s market, contact us here.