B2B blockchain-based payment: Can it beat the banks?

For anyone interested in supply chain finance and trade finance, a growing amount of number of articles tackle the issue of blockchain. For those who are not yet familiar with this term: it is the underlying technology behind the digital currency Bitcoin.

The starting point for this technology was to allow two parties to transfer a token of value (Bitcoin) from one to another, in a cheap, reliable and fast way. Three main criteria for it are: the two parties can be anywhere in the world, there should not be a central authority processing a transaction, and the same token (Bitcoin) cannot be spent more than once.

To meet all these criteria, the solution proved to be a distributed ledger containing all transactions and visible for all participants in the network. A transaction is approved by consensus, which is reached by cryptographic encryption. This technology is called blockchain. Many articles about blockchain focus on the way it works – hence they are very technical – but due to the complex terminology being used the result can be more confusion rather than clarity. Perhaps the authors of these articles have been inspired by former US president Harry S. Truman, who said: ‘If you can’t convince them, confuse them’.

Rather than focus on the technology, it is far more interesting to understand what it can do for businesses. The technology itself is very powerful and has the potential to radically transform how businesses work and how payments are transacted. If a Bitcoin can be transferred in such a cheap, fast and reliable manner, why not also a euro or a dollar?

The current situation of a ‘real-time payment’ is still dependant on banks’ cut-off times. The initiator of the payment sees the amount deducted from their bank balance; then the receiver gets the amount some time later. Depending on the sending and receiving bank, this period can range between a couple of hours and a couple of days. What happens is that the senders’ bank updates its ledger (the bank balance of the sender), sends the transaction (usually) via the SWIFT network to the receiving bank. Subsequently, the receiving bank receives the transaction and updates its ledger (the bank balance of the receiver).

Blockchain payments; how real-time are they?

As noted, blockchain is a distributed ledger or a shared database. All parties involved have access to this database, so each of those allowed to participate sees the same version of the truth. This means that if one party wants to send a token of value to another party, it updates the distributed ledger. When this update is agreed by the participants, the ‘new’ state of the ledger is accepted. With Bitcoin, the acceptance is done by miners, validating the transaction via sophisticated cryptographic encryption. A transaction is fully validated in approximately eight minutes.

The Bitcoin blockchain is a well-developed network with many miners that can vet a transaction. This Bitcoin blockchain, however, might not be the best blockchain for business-to-business (B2B) payments. There are providers in the market that are building new types of blockchains specifically developed to facilitate payments within a supply chain. This means that payments can be transacted, real-time and worldwide, at low cost. Next to the fast, low-cost payment processing there is another interesting aspect to blockchain-based payments. By using so-called ‘smart contracts’ payments can be made conditional.

There is a wide array of situations this can be applied to:

• A payment can be executed in case certain criteria are met. For example: a container with bananas arrives in the port of Rotterdam at an agreed time and by using special scanning equipment, the quality and quantity are checked and approved. When these criteria are met, a payment is executed automatically.

• A budget can be allocated and this budget can only be spent on predefined parties. For instance: a government provides a rental allowance for individuals with a minimum income. This allowance can only be spent at a pre-approved landlord and where it is not used before a certain moment in time, the allowance is cancelled.

• Various parties in a supply chain can all be paid when the end consumer purchases the product. For example, a consumer buys a song online. At the moment of purchase, the amount paid is distributed among the band, the producer, the studio and the record label. All parties are rewarded based on their added value.

Blockchain-based payments open up many possibilities. Not only is it possible to trade more easily and cheaply, but also payments can be made smarter. Banks are particularly interested in this new technology and are closely investigating the potential it may offer to them.

It is an exciting time for banks and payment institutions, as with blockchain the real disruption is knocking on the door. The disruption here is not that things are done a bit smarter, more efficient or faster. The disruption in payments is that there is technology available that makes banks, payment service providers (PSPs) and credit card companies redundant. Cutting out these middlemen by making use of technology that provides the same – perhaps even greater – trust and robustness will increase the speed of payments; as well as the possibilities for parties to trade with each other while significantly reducing costs.

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