P2P over IP – How Blockchain will Transform Purchase to Pay

Posted by Pete Loughlin in Blockchain, Purchase to Pay 12 Sep 2016

It’s been called the most important, most disruptive technology you’ve never heard of but if you haven’t heard of Blockchain, you’ll have certainly heard of its killer app – bitcoin.

Blockchain, the underlying technology of bitcoin, has been attracting a great deal of attention over the last twelve months and there are very few industries or areas of business that will not be profoundly affected by it over the coming years. Money has been pouring into research and development primarily into the FinTech space. This is unsurprising. The banks and financial institutions see the real possibility that bitcoin and other cryptocurrencies could cut them out of lucrative transactional banking business because, in the Blockchain era, there is no need for a trusted third party to manage payments.

Site LogoWhile the mature thinking is all about financial transactions, this isn’t the only place that Blockchain will have a big impact and there are a number of important use cases emerging that indicate that the application of Blockchain will go much further than finance including purchase to pay (P2P) and supply chain which will be among the business areas that will be most dramatically affected.

Now, you may think you’ve heard all of this before. The thing about Blockchain is it removes the need for trust. There is no need to trust either a trading partner or a third party intermediary. The Blockchain delivers the guarantees of authenticity and accuracy. And that provides some very interesting use cases in supply chains. Just as bitcoin removes the need for coins and cash or third party banks to provide security, so the Blockchain can remove the need for physical transaction proofs like bills of lading and export/import documentation. Just as the provenance of diamonds are now being tracked using Blockchain, so can the source of all goods shipped around the globe be assured.

Bitcoin has been described as “money over IP” – alluding to the analogy with VoIP which has transformed voice communications. Making a telephone call use to be about transmitting analogue signals via switches over copper but the internet has changed all that and anyone can speak to anyone else on the planet for free. In the same way, bitcoin has reinvented and democratized money. Instead of paying 3rd parties (so called trusted third parties) ludicrous sums to take days or even weeks to transfer cash across borders, we can now make payments in seconds at a fraction of the cost. And we can trust bitcoin because all transactions are recorded on a single ledger that everyone can see. The single version of the truth. And this is the key – the bitcoin Blockchain is the indisputable, single version of the truth.

Consider for a moment the way we do business today. I buy something from you and pay you. In a business to consumer sense (B2C) that’s as complicated as it gets but in a business to business (B2B) sense, it is more complicated. I create a Purchase Order (PO), record it and send it to you. You record it and call it a Sales Order. You then send me the goods and get me to sign to confirm I have them. You call that document a delivery note. I take a copy and call it a Goods Received Note (GRN) and I keep a record of it. Based on the confirmation of delivery, you send me an invoice. I check the invoice details against the PO and the GRN and if it all matches I make a payment. That payment is debited from my account and is credited to your account. You check that credit against the invoice to ensure it matches.

What a palaver! Why do we do this? I can hear accountants everywhere saying “It is obvious why we do this – it is the way we do things, to account for things, record them – make sure everything matches”. No, really, why do we do this? The answer is simple – it is because we don’t trust each other. I’m not paying an invoice because it says I owe you money. I want to check you delivered things to me. Besides, the accounts payable function in my business is separate from the business that orders and receive things so invoices need to be checked.

But this is all very old world. Very unconnected and paper based – even if paper is represented by something on a computer screen – it’s the way things have been done for centuries. When you come to consider it, modern technology hasn’t changed these basic business processes much at all. For 20 years, we’ve been tinkering around the edges but fundamentally, nothing has changed.

But what is worse than the meaningless processes that we still follow (all based on an assumption that buyers and suppliers can’t trust each other) is the duplication of effort. I have a PO, you have a Sales Order. They represent the same thing. You keep a record of delivery, I keep a record of receipt. They are the same thing. Each debit in my bank account has an equivalent credit in yours. Separate records that represent the same transaction held in separate ledgers. But let’s take a conceptual step and imagine that we record all of these steps of our trading transaction, not in our own separate ledgers, but in a single ledger – a Blockchain – an indisputable set of records that we can both trust so that we don’t need to trust each other. That would be cool. An order is placed. That is recorded in the Blockchain. No need for a sales order – what would be the purpose? The order is fulfilled and a single record on the Blockchain confirms this – indisputably. Then an invoice … wait. Why would we need an invoice? The order details and the record of delivery are agreed, why not just pay? And why wait to pay? And why use a bank?

The supply chain finance use case of Blockchain is already out there but I think the impact on B2B transactions goes much further than being able to pay early. Not only would there be no need for invoices – and I don’t mean no more paper, I mean no more invoice – as a concept it become meaningless – there would be no accounts payable people, no accounts receivable teams. Why would we even have purchase ledgers? What would happen to our ERP?

This may all seem a long way off but we’ve been here before. In the early 1990s, the internet – the new technology infrastructure – was seen as something incredibly important but it really had only one killer app – email. Then came the World Wide Web and within a decade the world was unrecognizable. We are at the beginning of one of those decades. The new infrastructure is the Blockchain and the killer app is bitcoin. The B2B crystal ball has too many imperfections in it to be able to see the future with complete clarity but if we look hard enough, we can get the gist – and it’s fascinating.

Pete Loughlin can be found on twitter @peteloughlin

  • PS March 15, 2017 at 3:22 pm /

    I get all this or at least I’m starting to get it. Here’s my question though:

    Currency is very digital in certain regard even without blockchain. Banks already move debits and credits digitally, they are not actually moving piles of cash for each transaction.

    But goods are physical, so while the PO & Sales Order aspect is digital, the Delivery Note has physical component to it. So, say my Delivery Note says I delivered five widgets, but my packer only put four widgets in the shipping box by accident.

    Are their then transactions to address the discrepancy?

    And what about outright fraud? A dozen bottles of 1990 Petrus are being shipped. In transit, the bottles are taken and replaced with a dozen bottles of phony Petrus. Certainly, the receiver can receive them, but 6 months later, the first bottle is opened and discovered to be fraudulent. What happens are that point? Are transactions somehow eliminated from the ledger since 12 bottles didn’t actually go from Point A to Point B? The bottles went from Point A to Point X. Granted Point X is not able to provide provenance electronically, but maybe Point X has provided Customer Y with quality goods in the past so Customer Y really doesn’t care about the provenance because the Point X supplier has been providing quality goods.

    I’m not arguing with the blockchain concept, just trying to understand these edge cases and how they could be addressed? I’m sure there are other more plausible use cases, but you get my point.

    Thanks! Look forward to your reply for some further education.

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