Blockchain has attained a status in the finance sector, that no one believed would be possible. How did blockchain achieve so much and in such less time?
FREMONT, CA: Blockchain has transcended from hype to highly valued technology with innumerable real-world applications, especially in the business sector. Since 2017, the technology has gradually hailed to the position of power at present with full operational deployments and disrupting fundamental processes of business in lines of buying and selling. The technology is converging to mainstream accounting technology utilized to record every business transactions made.
The critical attributes of the blockchain technologies are distributed ledgers, decentralized databases, the omission of the third-party intermediaries, and highly encrypted transactions and transparency. These characteristics meet the critical requirements of finance and accounting (F&A) operations. By integrating blockchain into F&A operations, the transactional trust can be increased along with a reduction in fraud risk, low transaction costs, and accelerated process times. Some key enablers of Blockchain in F&A processes are:
• Smart Contracts and Smart Assets:
A smart contract is a program that runs on blockchain technology. It establishes the rules for the contract and automatically enforces the agreement when the state rules are met. The contract allows the computer protocols to verify and implement the agreement to radically reduce the transactional costs related to delivery, formalizing, and enforcing the agreement. The rules stated in the smart contract encompass smart assets that are unique virtual tokens that depict tangible and intangible assets. The blockchain technology allows the assets to be tracked in real-time, revolutionizing the mechanics of trade finance, working capital, and supply chain management.
• Expedited Processing (for Clearing, Settling, and Payments):
The digital records that operate on blockchain have the leeway to accommodate real-time settlements via the network saving massive costs on overheads. At present, the current status for the fulfillment of the transaction is three days, but, with blockchain, the norm is replaced with near-instant settlements. The speed of the settlements is favorable to all businesses by contributing to the working capital and displaying a reduction in payment overhead costs and error-related delays. Even traditional banking processes are evolving to accommodate the blockchain technology.
• Digital Identity Management:
Due to several instances, blockchain may be the ideal solution for several challenges related to identity management within the business. These challenges extend well beyond the range of areas like fraudulent data, GDPR compliance, and data leaks, identity theft, and identity authentication. The blockchain network avails encrypted and rigorous checks that balance and protects data authenticity of all the parties involved.
There are innumerable ways in which blockchain is transforming the F&A processes, but the most crucial of the factors are discussed here:
1. Streamlined Procurement Processes: Tamper-proof smart contracts allows for efficient purchase order (PO) matching and invoice management. This technique will eliminate PO validation and approval, invoice processing, two or three-way matching, and the entire backend request-to-receipt processes.
2. Integrated, Secure Accounts Payable Invoicing: The technology allows seamless e-invoicing and payments to be made automatically from the buyer to a seller through secure encrypted channels. The process will simplify the tracking and monitoring of transactions transparently and ensures that an audit trail is easily available from the blockchain network.
3. Elimination Of Accounts Payable Discrepancies: The technology provides an easily verifiable real-time audit trail of the goods included in the transaction and will reduce accounts payable price along with quantity discrepancies.
4. Automated Travel And Expense (T&E) Processing: Smart contracts and automated settlements enabled in Blockchain can eliminate the application of cumbersome tasks. These tasks include expense report submission, audit, and other tasks that are usually associated with T&E processing.
5. Seamless Payment Processing: The method of processing payments can be immensely affected with the payment processes making it smooth and transparent using the blockchain settlement networks.
6. Automated Order-To-Cash Processes: Smart contracts avoid overpricing or any related price discrepancies, allowing discounting with accurate pricing. Holistic compliance is ensured when in terms of transparent transactions by providing a thorough audit trail. The smart contracts can also facilitate accurate receivables, reducing the necessity for manual cash applications, deductions, and disputes management.
7. Efficient Record-To-Report Validation Processes: The pre-validation process maintains security in the blockchain network. This step eliminates the need for excessive information collection in the master data, which is carried out separately for supplier and customer.
8. Accurate Record-To-Report And Reconciliation Processes: The distributed ledgers technology reduces the amount of time spent on combining reports and reconciling and simultaneously focusing on the increase in accuracy. Blockchain accommodates a closer integration of customer and supplier data enhancing the controls and facilitates programmed real-time auto-balance reconciliation. Interconnected ledgers via blockchain decrease the dependency and automate financial processing immediately. The distributed ledger system within blockchain has the capacity to transform the transaction processes among internal buying and selling parties.
Many data scientists have dwelled on the blockchain technology to fail; some have also commented that the blockchain train has departed the finance and accounting station. Several others have believed that the blockchain technology is an evolution from a fundamental accounting concept that has transformed from the proven book keeping practices. Regardless of the opinions, technology has proven the world that the finance sector has finally arrived at the status achieved at present. Various other technologies have also sprung in finance to provide an ease of management of transactions. Combining other technologies with blockchain, like robotic process automation, AI, and ML, can increase efficiency. These technologies can complement blockchain and significantly disrupt the finance and accounting processes, as it exists today.