How blockchain is helping SMEs
You’d be forgiven for thinking of cryptocurrency when you hear the word blockchain. However, it has come a long way since its inception in 2008 as a public transaction ledger for Bitcoin. At the core of every blockchain is Distributed Ledger Technology (DLT).
Originally built to underpin cryptocurrency exchanges, it has now evolved into one of the world’s fastest-growing and most publicised technologies with the potential to reshape our economy and society in ways not seen since the advent of the internet.
With so many powerful benefits, organisations large and small are clamouring to take advantage of this innovative technology to give their businesses a competitive edge. But what exactly is Blockchain, how can it impact your business and is it too good to be true for SMEs?
Back to basics
Perhaps the most well-known use of Blockchain is the sending and receiving of payments to anyone in the world. However, Blockchain has much broader applications and the benefits for small businesses extend far beyond just providing a secure payments platform. Blockchain is creating new opportunities for businesses in every sector to solve existing challenges and develop new business models.
The technical definition describes Blockchain as a distributed database designed to facilitate transactions and keep track of assets. But the best way to understand this is to imagine a massive, virtual spreadsheet, duplicated across multiple computers, or nodes, which are all connected to each other forming a chain. When you add to the spreadsheet, each copy on the chain gets updated with a timestamp, making it almost impossible to tamper with.
One of the biggest universal challenges plaguing small and medium size businesses is cash flow. In fact, recent research by We.Pay found that more than 40% of businesses reported cash flow issues within the last year.
Blockchain promises to solve this problem in the form of ‘smart contracts’, which as their name suggests, not only automate agreements but also enforce contracts between customers and suppliers. Think of a smart contract as a self-executed, coded agreement that delivers guaranteed outcomes if certain preconditions are met.
This will potentially make life significantly easier for businesses. Creating frictionless and efficient transaction processes and allowing invoice payments to be done more quickly and without the need to chase for payment.
Decentralisation and security
Another advantage of Blockchain is the security benefits it provides. Blockchain applications are inherently decentralised, meaning that data is distributed to different computers around the world in parallel. Transactions cannot be manipulated or deleted through a cyber-hack because each transaction is linked to the one that preceded it.
With cybercrime costing small businesses across the UK an estimated £13.6 billion in 2018, and four out of five companies in Europe experiencing at least one cybersecurity incident over the past year - this couldn’t come at a better time.
Supply chain management
Blockchain has the potential to help SMEs build smarter and more secure supply chains. Since most products are not made by one single company, a Blockchain-backed supply chain means that each transaction from point of origin to point of sale can be tracked through a transparent and traceable audit trail with real-time visibility.
This not only helps reduce fraud as mentioned but also improves inventory management, which has traditionally been a complex and laborious process, especially for small businesses.
Not if but when?
HSBC UK supported the first transaction on the blockchain supply chain finance platform we.trade last year. Our client, Beeswift Limited and its corporate buyer in the Netherlands participated in the transaction. Use of the we.trade platform allowed Beeswift to complete its trade finance transaction within a day, rather than the average 40-45 days it traditionally takes. It was the first transaction where two buyers used the system end-to-end, including the ability to write the invoice, agree to trade terms, provide the online letter of credit, know as a bank payment undertaking (BPU), and additionally receive funding from that.
Blockchain has the potential to answer a number of issues businesses encounter; payment transparency, supply chain issues, cybercrime and a lack of necessary information to conduct business efficiently.
However, businesses need to be cautious. Blockchain and its potential benefits are well publicised but like all new technologies its benefits, applications and limitations are only just beginning to come to fruition. Businesses need to question whether Blockchain truly answers the challenges the business has.
First and foremost, you need a peer network to use Blockchain otherwise it is obsolete. For instance, in a supply chain each component supplier of a particular product would need to be in the chain for the company that assembles and markets the final product.
The cost of data centres, electricity and servers that need constant upgrading may be a barrier to entry for many businesses. Whilst Blockchain may sound like a simple virtual solution they use a significant amount of energy as it constantly updates. Although it is improving, this isn’t currently a ‘green’ business solution.
It’s very easy for Blockchains to become too big, too quickly. Any changes to the Blockchain needs to be thoroughly tested and mirrored across every part of the chain otherwise it can blow out. Blockchain is a sequential chain of blocks or data records, that contain transactions, files or other important data.
When you try to then cut that into more controllable slices it isn’t always possible and it doesn’t eradicate the cyber-crime risk completely. Each slice could provide an opportunity for fraudsters to hack into the system.
The process of adoption will be slow and steady, and there will be setbacks. Nonetheless, Blockchain is at a tipping point, and for those willing to accept decentralisation as the future of business, it could solve many of the fundamental challenges SMEs experience on a daily basis. And it could level the playing field when it comes to competing against larger enterprises. Much like the infrastructure that supported the roll out of the internet, Blockchain is less a ‘disruptive’ technology than a ‘foundational’ one.
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Zafin: Banking is now in the era of the tech ecosystem
The development of tech ecosystems is placing the future of post-COVID banking in jeopardy. At a time when Big Tech can replicate the functions of traditional financial institutions, what can banks do to retain a grip on the market?
John Smith, EVP Ecosystem at Zafin, has a few ideas. A SaaS cloud-native product and pricing platform for financial institutions, Zafin is preparing the next generation of banks to cope with this precise challenge.
Smith is responsible for the strategic and tactical management of the company’s ecosystem, including the creation of new business models to support growth and differentiation. We asked him four questions:
Q. Have the events of the pandemic caused an irreversible shift in the digitalisation of banks? If so, is COVID the sole cause or are there other factors?
It’s a great question and one that I am asked a lot. Without a doubt, the COVID-19 pandemic has driven a significant shift in the acceleration of digital. In fact, I’ve seen some estimates show there to have been as much as four to six years of digital adoption growth since the initial lockdown started.
While the pandemic may be the primary reason for this growth, two other drivers include fintech disruption and the high costs of operating a traditional retail bank. Both of these factors have caught the attention of banking executives as they set their minds on accelerating digital transformation with a focus on high return, low risk.
Q. Some commentators believe banks must learn from Big Tech in order to survive. Do you agree? Please expand.
I agree completely; we’re living in the era of the ‘ecosystem’. All the seismic shifts we’re seeing in technology, be it aggregation, embedded finance, DeFi or hyper-personalisation are all enabled by the foundation of an ecosystem.
When financial institutions work with a strategic partner like Zafin, which has made the strategic investments in a best-in-class ecosystem, they’re able to capitalise on opportunities more quickly and safely, and will be better positioned for growth now and at the other side of the pandemic.
Q. What are currently the obstacles to adopting Open Banking? Is it more likely to 'take off' in some regions rather than others?
I would argue that Open Banking has been in the US for some time and will only continue to grow there. By definition, Open Banking is about the secure sharing of financial information that customers are aware of and have authorised. Under that definition, we’re seeing aspects of this well underway even though its full potential remains to be seen.
Third-Party Providers are a natural outcome of Open Banking, whereby they can create propositions beyond what a bank normally does to enable banking functions such as payments, borrowing, saving and so on. Once again, some of these are already present through industry-led initiatives, whereas regions such as the EU have taken the pathway of regulation such as PSD2.
The industry-led initiatives we’ve seen in the US have also had the added advantage of guard-rails that regulatory bodies like FFIEC and CFPB provide. There are also other technology-led initiatives such as API definitions that are set out through the FS-ISAC.
I would argue the future of Open Banking in North America will be through the natural evolution of the guidelines and API definitions that have been published, as well as the natural progression of industry initiatives.
Q. Are there any other bank tech trends you'd like to discuss?
Coreless banking. Zafin has been pioneering some of the work around externalising functions out of the legacy core to drive a more ‘fintech nimble’ bank, while not having to deliver a ‘heart and lungs’ core bank replacement.
Real life examples of this include moving some of the core functions of a banking system, such as product and pricing to a platform like Zafin. Origination, onboarding, KYC, risk, and compliance are all other examples of externalising banking functions for added agility.