Fintech 2016: Applying the blockchain
Starting by transforming the workflows around invoices, Applied Blockchain is developing practical uses for shared ledger technology on private networks.
As the world’s biggest banks and technology companies continue to trial private blockchain consortia engaging in all manner of wholesale banking activities – issuing commercial paper, trading bonds, settling syndicated loans – across the distributed ledger, it seems that big industry incumbents are quickly adopting the disruptive technology new entrants had hoped to undercut them with.
But there are still entrepreneurs delivering breakthroughs on the blockchain. One such is Adi Ben-Ari, a technologist who took an MBA at Tel Aviv University and worked in enterprise IT for 20 years, first in telecoms and later at Lloyds Bank.
“I rather ignored bitcoin, and only came to blockchain comparatively late, two years ago when I studied smart contracts on the Ethereum platform and saw the potential. That just blew my mind,” Ben-Ari says.
He founded Applied Blockchain, assembling a small team of technologists to develop practical use cases for new applications on private blockchains.
“While we’ve focused on Ethereum smart contracts, we don’t yet know if the Ethereum blockchain software is the answer because it does not scale well for private blockchains," says Ben-Ari. "We have set out not to change the world, but to ask in a very pragmatic, almost mechanical fashion: ‘What does this new technology enable us to do that is different and useful?’”
Its first practical application has been to transform the highly inefficient often paper-based and manual processes around delivering, processing and paying invoices, putting new blockchain technology close to the heart of corporate treasury.
This first venture is in collaboration with a firm called Tallysticks, also co-founded by Ben-Ari and Kush Patel. It is now in a pilot operation with Emplas, a UK-based SME that makes windows. It exchanges invoices and payments with a range of counterparties, including some quite large companies that are component suppliers, down to building contractors that buy its finished products.
“There are two schools of thought on blockchain,” says Ben-Ari. “The first is that this is essentially a technology to take transfer of an asset, time stamp it and establish an immutable ledger of record for transfer and ownership of an asset. The second-generation approach to blockchain, which is our approach, is around sharing data to drive whole workflow processes much more efficiently.”
In the new invoice-on-blockchain product Applied Blockchain has developed with Tallysticks, the application plugs into the enterprise accounting system of Emplas and connects with their suppliers and customers. The company acknowledges receipt of invoices, which are mutually recognized and stored, so removing the need for cumbersome reconciliation between disjointed ledgers.
“Today, it can take five days or more for a buyer, once it has received an invoice, just to upload it to the right department for acceptance and approval even before passing it along for payment. We have talked to companies that tell us sometimes, when they are being chased for an unpaid invoice, it’s actually cheaper to pay twice and later ask for reimbursement if a payment is duplicated than to go to the expense of chasing down mis-directed invoices internally.
“Then suppliers, if they require invoice financing to help their working capital needs, typically find that banks have to duplicate the original buyers’ processes of finding and verifying invoices – which are often paper-based or PDFs – and then do even further checks that these have not already been pledged to other lenders.
“It is,” he says “an administrative nightmare.”
With both buyer and supplier plugged in through a private blockchain, it becomes easier to establish the provenance of an invoice. Banks have already approached Tallysticks about potentially plugging their own invoice finance solutions into the application.
Once blockchain technology becomes integrated into the core of a business’s treasury department, it becomes logical to extend efficiencies around payments even further, into receivables as well as payables.
Tallysticks won a Barclays hackathon late last year. Ben-Ari says: “We were able to integrate with a Barclays smart-phone app, called Launchpad and designed to permit direct transfers from a bank account using pre-approved credit limits, rather than paying the fees on credit cards, for large consumer purchases.
"So that’s a way for some of the small building contractors who buy the window-maker’s finished products to settle their invoices: with a couple of clicks on the smart phone. We have integrated this through the company’s buyer portal.”
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The end result, almost as a side benefit but one that creditors should welcome, should allow the company’s accountants and treasury staff an accurate view in real time of its cash flow.
Tallysticks managed to connect that leg of the payments process within 48 hours during the hackathon and was subsequently brought into the Barclays accelerator. But Tallysticks is also talking to other banks about invoice financing. And it is talking to other large customers, including to governments thinking about the application of blockchain technology to VAT payments.
Ben-Ari hints at more plans in the works involving private blockchains. “Applied Blockchain is working on four or five uses cases that are quite unrelated to each other, including one with a top-tier investment bank.”
He sees issues around an excess of transparency in smaller groups of market participants dealing in markets on shared ledgers where some information is price sensitive.
“We have developed a privacy layer over smart contracts so that participants can decide which pieces of data different participants can see," says Ben-Ari. "So on the invoice application, for example, the buyer and supplier can both see the full invoice and then permission a bank lender to view it.”
He says: “The bank lender can then be recognized as the beneficial owner of the invoice and its associated payments. Given the new speed and efficiency of the process, the first lender could then sell it on. We could even start trading invoices.”
It seems a bit otherworldly.
Ben-Ari says: “I want to take pragmatic, real-world steps. But those people saying that the blockchain will transform everything – they might be right.”