Finance and Accounting
Building the Blocks of Future Finance
An Overview of How Blockchain Transforms Finance
You may have come across the term “blockchain” quite a lot in the last decade if you follow banking, investments, and the rise of the cryptocurrency such as bitcoin. It’s also known that blockchain constitutes a distributed public ledger storing key financial information. Blockchain keeps information in the public view, distributed among the participants, while at the same time ensuring an exceptional level of data security – the transactions stored on blockchain are virtually impossible to tamper with. In Infosys BPM’s recent webinar titled “Powering the Future of Finance Through Blockchain,” our team of experts discussed exactly what it is and how it affects the way we do business today.
Chaitra Nayak, the head of analyst relations – Infosys BPM, brought together Vinay Gopal Rao, the Head of Finance & Accounting and Sandeep Sahadevan, Sr. Domain Principal & Head - Key Solutions & Alliances, FCOE; and they were joined by Shirley Hung, VP – Everest Group. A lot of insightful information on blockchain was discussed in this webinar. Here are the key aspects from it.
Q: Shirley, to start with, we have been hearing a lot about blockchain and how it’s a transformative technology. Could you shed some light on what it is and how it works, for the most of us who do not understand the bells and whistles of it?
Shirley: Yes. The idea of blockchain was created back when the cryptocurrency bitcoin came into existence, nearly a decade ago. While most people associated blockchain to bitcoin and other cryptocurrencies, the idea is far broader than that. It has many specific use cases in a variety of domains, beyond cryptocurrency. To understand blockchain, think of it as a distributed, encoded digital ledger - a digital chain of blocks with information. Its users, in accordance with a consensus among them, validate the data in the blockchain. Its adoption entirely transforms the way transactions are defined, tracked, and managed. Its ability to dramatically transform the way transactions are tracked comes from its innate ability to create trust among strangers who use the system. This trust is the result of the transactional ledger being replicated among all users who validate the transactions. Since the data is distributed, it removes the need for a centralized authority to manage data or validate transactions. In addition, this eliminates data loss due to failures in individual nodes. In essence, the distributed ledger preserves the entire history of transactions. This makes the system tamper-proof. In addition, conflicting transactions are not present in blocks, eliminating double-spend scenarios.
Q: Very interesting. How will the blockchain technology affect the future of finance? In your opinion, what kind of opportunities exist for future finance leaders to adopt blockchain?
Shirley: Blockchain presents immense opportunities in finance. To start with, it reduces operational cost by a significant amount by eliminating duplicate effort on book maintenance and data validation. The need for data extraction is eliminated since the parties involved in each blockchain-based transaction have direct access to the full data. This means reconciliation is virtually non-existent. You can imagine the kind of speed this will bring to financial activities such as period-end closing. Since the ledger is the same and accessible to all parties, disputes do not arise, and as such, the cost for dispute management and handling will go down or disappear. Transactions on blockchain are easily traceable to their origins. This means the capture of an audit trail becomes automatable. Another area that blockchain improves finance is in security. Each transaction is cryptographically sealed and linked to previous ones, thus making it nearly impossible to tamper with the data. In addition, the reporting of data in real time helps drive more robust decision-making in finance.
Q: How would this work in a real-life scenario? For instance, in case of a normal vendor transaction within an organization?
Shirley: Consider a purchase process. In normal circumstances, a company sends a purchase order to a vendor. When the order is placed, the vendor sends an invoice. During this time, the company’s order data and vendor’s payment data are reconciled separately. On the other hand, in case of a blockchain-powered reconciliation process, both the companies will be recording the transactions in a single ledger, accessible by all, holding both the purchase order and invoice information. This completely obviates the need for reconciliation.
Q: Is the blockchain technology accessible and useful in all financial scenarios? Are there any specific areas that this is most suited to? If so, which are they?
Shirley: Everest Group has researched into the specific areas where blockchain has been helpful. The adoption scenarios were studied based on the business impact and the ease of adoption. What we have identified is that blockchain adoption is more amenable to high-volume business processes with multiple intermediate parties and touchpoints. Examples include accounts payable, accounts receivable, order management, billing, inter-company reconciliation processes, and general accounting. Successful implementation, however, needs strict coordination and collaboration among a wide variety of stakeholders from different departments. As such, an entity that holds disproportionate control over other parties should be involved at the helm of blockchain adoption. There are also processes that do not require any external collaboration, such as inter-company transactions and internal audit.
Vinay: Take a look at the smart contract feature of the blockchain. It allows for automated payments and automated receipts. This means time is not wasted with intermediaries. Another key aspect is record to report solution (R2R). It’s one of the key use cases that Infosys is working on with respect to blockchain. It means, at the click of a button, people can access their entire financial information without any hassle. Nowadays, everything is expected to be in real-time; this is hence exceptionally useful. The periodical reports, however, can still be prepared for regulatory purposes. It even eliminates the need for automation unlike in other tools and technologies used today.
Q: What is the market outlook with respect to blockchain? Have you seen adoption of the technology by any large players?
Shirley: Yes. Large companies including a large CPG company and a large bank are transforming their accounts payable processes through blockchain.
Vinay: In terms of the blockchain market, if you look at Europe, over 22 countries have signed up to be in a blockchain partnership. If you look at banks, their investment in blockchain has doubled between the years of 2018 and 2020. This will grow to a 200 billion dollar market by 2025.
Q: Are the effort and investment involved in implementing blockchain justified in the short term? How effective do you think can the result be in the short to medium term?
Shirley: One of the things that most business leaders look for is the effort and investment involved in implementing a new technology or business process and whether it’s justified in bringing the ROI in a reasonable timeframe. But in the case of blockchain, the initial investment and effort needed are on the higher side and the benefits derived from it are more gradual and felt in a longer timeframe. This creates more complexity when developing the business case for investment.
Q: Are there any significant challenges to the implementation and adoption of blockchain?
Vinay: I would mention a couple of challenges in the implementation.
- Change management: In each complex finance process, there can be multiple parties such as suppliers, banks, customers, etc. Bringing them together in a single blockchain-based ecosystem can be quite arduous.
- Business cases: Identifying the business cases that are apt for the adoption of blockchain is another challenge.
Shirley: Another challenge that I can think of is the lack of talent in blockchain and cryptography with respect to financial processes. In addition, it’s also harder to achieve scale with blockchain, specifically due to its decentralized nature. This means, when multiple parties following different standards are onboarded, it will bring about exponential complexity in the blockchain system. Furthermore, regulatory challenges play a part in blockchain adoption. This is because existing regulations may not cover some of the technologies needed, including cryptographic signatures and decentralized data ownership. Tax systems that vary by geography may also pose a challenge. Finally, but certainly not the least, employee pushback due to perceived impacts to their jobs and roles may occur. It will be critical to manage these change management issues when pursuing a successful blockchain initiative.
Q: Vinay, while talking about blockchain overall, could you also give an overview of Infosys BPM’s perspectives on such disruptive new technologies? How has it been historically in an F&A perspective?
Vinay: Yes, Infosys BPM has always steered towards groundbreaking technology initiatives to bring transformation in the F&A function, almost from the beginning over 15 years ago. We evolved through workflows, point solutions, and platforms to using blockchain now, augmented by artificial intelligence and machine learning. Also, Infosys Group, our parent company, is heavily invested in blockchain technology with hundreds of practitioners. This has helped us stay ahead of the curve in terms of blockchain adoption.
Q: According to you, what drives a leader towards the implementation of blockchain?
Vinay: If you look at CFOs, they are quite vexed by a few aspects:
- Manual processes
- Presence of a number of intermediaries
- Need for interventions
- Lack of digitalization
Blockchain brings a solution to all of these issues. For instance, think of the aspects that accountants and auditors are most concerned about – accuracy and controllership. When blockchain takes care of these aspects, the accountants and auditors can focus effortlessly on their core activities of recording and reporting of financial transactions. Another aspect that you can look at is the distributed nature of the database. While traditional finance revolved around centralized databases, the ledger in blockchain distributes responsibilities and makes the financial processes more and more efficient. Another aspect to consider is the security of transactions. Blockchain has a built-in security aspect that makes it nearly impossible to tamper with data. Also, it allows you to dispense the funds in near real-time, as opposed to the three-day timeframe of today. Essentially, the blockchain gives:
- Working capital efficiency
- Reduced payment overheads
I believe blockchain works in the 95-40-25 rule – it lets you eliminate 95% of the errors; improves efficiency by 40%; and elevates customer experience by 25%.
Q: How do you tackle the challenges in blockchain adoption we discussed earlier?
Shirley: Governments worldwide are working towards developing regulations and standards for smooth adoption of blockchain. Many organizations have managed to move their blockchain implementations from the proof of concept stage to final implementation. In order to implement blockchain successfully, companies must clearly articulate the business value they expect from it. Also, they must invest in the right use cases. In addition, the technology approach, including selecting the right blockchain platform, is vital. Service providers, such as Infosys, are rapidly building blockchain platforms to allow companies to implement them effectively. In addition, blockchain’s effectiveness can be amplified further by augmenting it with other digital technologies such as AI/ML, smart contracts, and automation.
With its myriad business applications and many potential use cases being explored, blockchain is making its presence felt across all industries. It has become an industry buzzword for global investors as well. It aims to make financial processes and operations more efficient, precise, and secure.