Build on Blockchain?
While some middle-market firms have already adopted distributed ledger technologies, there is still disagreement—and confusion—about how best to use it.
This article is sponsored by TD Bank
The term blockchain may conjure scenes from “The Matrix,” but the distributed ledger technology is slowly being incorporated into companies’ finance operations. Although some middle-market firms have already adopted distributed ledger technologies, including blockchain, there is still disagreement—and confusion—about how best to use it. The terminology doesn’t offer much clarity: While all blockchains qualify as a distributed ledger technology, not every distributed ledger is a blockchain.
A survey conducted by TD Bank at the 2018 Association for Financial Professionals Conference reflects this uncertainty. Although 90% of survey respondents, which included corporate treasury and finance professionals, agree blockchain will have a positive effect on the payments industry, they are split on the technology’s top impacts. When it comes to the blockchain’s most powerful implications, 29% of respondents think the technology will create stronger audit trails; 22% said it will speed up payments; 21% believe it will improve efficiency of cross-border payments; and 18% stated blockchain will reduce fraud.
Blockchain has several applications for middle-market companies, from communicating with their financial institutions to negotiating contracts. Currently, most of these operations are done manually, which can lead to lost or deleted files and copies, along with delays from mail delivery or from scheduling in-person meetings for signatures.
Reducing these time-consuming processes is one way businesses benefit from blockchain. Because the technology adds new data as “blocks” secured by cryptography, each entry or change during a contract negotiation leaves a breadcrumb of information that must be validated by all parties. Using this method creates a chronological record of activities and adds efficiency because participants can work simultaneously.
Faster Transactions, Fewer Risks
TD’s survey also revealed a challenge: Faster and real-time payments are coming soon, but organizations still face obstacles when implementing them. One is not having the technology or capital resources to support these transactions. Another growing concern is payments fraud and cybercrime. In fact, 44% of corporate finance professionals cited fraud as their top operational challenge, up 14% year-over-year.
As more middle-market companies rely on electronic financial records and transactions, it is no surprise that fraud and cybercrime are growing concerns. Enter blockchain. Preventing fraud is an area where distributed ledger technologies could benefit commercial finance. While no financial transaction is ironclad, blockchain leverages cryptography and requires parties to agree to something before it occurs— say, moving money from a bank account to pay a vendor. The requirement to have multiple approvers and the cryptographically secured result can make it difficult for fraudsters to engineer scams because they would need to impersonate several parties to do so.
Blockchain’s biggest benefit is that it provides a “single source of truth.” Whether used for data collection and distribution, tracking contracts or sending payments, blockchain offers consistency of records. With more time and deeper knowledge, executives will find this “techie” concept offers a tangible boon to business.
This story originally appeared in the July/August print edition of Middle Market Growth magazine. Read the full issue in the archive.
Richard W. Burke Jr. is head of corporate products and services at TD Bank. He oversees treasury management services and commercial liquidity management.
