Monday 29th Oct 2018
Blockchain technology is nothing short of a revolution for the finance industry, and has the potential to be the biggest upheaval since the invention of the internet. It’s still in its early days, known mainly for underpinning Bitcoin, and there are many other industries that are exploring it in detail too, but it’s likely that finance will see the biggest change, with potential benefits from almost everyone involved, from banks, to finance providers and even consumers that use those services. Let’s take a look at how this revolution might well change things, and in particular, how it might impact the invoice finance market.
What is Blockchain?
To understand how blockchain benefits work, we first must understand what blockchain itself is and does. Using advanced cryptography, blockchain is essentially a method of recording transactions onto a digital ledger. What sets it apart from a normal digitally-stored ledger is that it is completely decentralised - the blockchain is stored across multiple computers simultaneously on a network, whether just a handful, or thousands of them. When anything changes, all are updated at once. In addition, the transaction and its information are recorded as a simple ‘block’, which then becomes part of the ‘chain’ chronologically. This system is the basis for most cryptocurrency, but can also be used for all manner of ledgers.
What the Benefits of Blockchain in Finance?
There are several major benefits to conducting business this way, which is why people are so excited.
The first is that using blockchain technology will theoretically speed things up a huge amount. For example, if we imagine that every time a bank or other user wants to make changes to a ledger it has to temporarily close off access to it, then make the changes, and ensure that this is recorded properly elsewhere. Multiple changes in a short period have to be dealt with sequentially, and while they might be quick, things stack up. With a blockchain, all information is changed instantly in all instances of the blockchain’s hosting, across the network, at the same time. This could make transactions much quicker to process.
Another big benefit is that the nature of blockchain recording and ‘storage’ is that it is hugely resistant to being hacked. Attempts to modify the blockchain can be very easily spotted, because it would be nearly impossible for this to happen across all of the network at once. The information stored is also very simple, and is always sequential, further making fraud difficult.
A final point to note is that the instant recording that blockchain offers helps to remove the middle man. There’s no real need for someone to hold money as it’s transferred from one party to another, or in escrow while certain conditions are checked and met, if the blockchain is able to instantly verify transactions.
How Might Blockchain Change Invoice Finance?
The whole process of verification of transactions can be particularly useful for the invoice finance industry, because those who wish to purchase invoices, or lend money against them, will be able to see exactly the transactions that have occurred. All aspects of the supply chain process can be time stamped, and verified by all parties, which means that the information is reliable, especially as it’s also immutable. Several companies have already begun offering platforms that join invoice sellers with buyers using cryptocurrency tokens based on this technology. There are potential advantages for traditional invoice finance providers using blockchain too, because the improved method of storing information is likely to mean that they can offer potentially better rates due to better visibility and efficiency. This may allow them to expand their offering, and does of course mean that SMEs that are looking for invoice finance may find it easier and quicker if they take part in a blockchain system.
For a more detailed look at research and development into this Hitachi article takes a deeper view of the various components of blockchain and how they can be utilised.
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