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Invoicing: the ultimate blockchain application?

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Can blockchain technology succeed where other solutions have failed and bring payments and invoicing closing together? Dudley Gould examines the benefits blockchain could bring to businesses and their accountants.

2nd Mar 2022
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The meteoric rise of global payment processors like Wise and Revolut has transformed consumer-facing payments. Five million in the UK now use open banking and the adoption of open APIs in the banking sector has opened up new possibilities in B2B payments, removing friction for businesses by cutting data entry demands and (in many cases) reducing fees. Accountants and taxpayers will have experienced this first hand, with over £1bn in tax being paid to HMRC via open banking.

Enter blockchain technology into the payments space, which promises to accelerate, if not leapfrog the ongoing innovations in traditional payments by introducing radically new levels of transparency, real-time settlement speeds, and minimal transaction fees owing to the peer-to-peer nature of distributed ledger technologies.

However, payments are still a relatively isolated activity and are siloed from invoicing, which continues to be a pain point for businesses and their accountants. Despite the introduction of e-invoicing, innovation in the space is slow, and issues such as late payment of invoices to freelancers and SMEs are yet to be fully tackled. 

Technologies that can bring invoicing and payments workstreams closer together will have multiple benefits for all parties. While there are a handful of traditional vendors seeking to achieve this, blockchain technology may offer a far superior solution.

Benefits of bringing invoices and payments closer together

Enhanced credit scoring

Currently, credit scores are based on historic aggregated data that don’t take into account day-to-day activity. 

If invoices and payments were combined, it would be easier to tell if invoices were paid on time and this data could help to construct more accurate credit scoring models. This would be particularly helpful for new businesses that have limited history due to having not yet filed first-year accounts.  

Instant and cheaper financing options

Real-time credit data also opens up the possibility of early-stage businesses and individuals accessing a range of financing options that are faster and cheaper than what is currently permitted with credit models based on aggregated historical data. 

If a business is able to provide their real-time credit scores based on their invoice and payment data, this would allow them to access a number of invoice financing opportunities to leverage their growth. 

Additionally, these funding options would likely be cheaper due to businesses being able to submit their enhanced credit scores in real-time, which lenders can screen, assess, and even approve programmatically rather than manually.

Incentives for companies to pay on time 

If a new supplier wanted to ensure they were working with a reputable customer, they could ask to see proof that they had paid their invoices on time. This wouldn’t require a company to open up all of their raw data: just an encrypted proof of a prompt payment history would need to be provided.

This would incentivise businesses to pay their contractors and service providers on time in order to attract the best talent and service in the market.  

While there are a handful of traditional vendors seeking to achieve these benefits with traditional payment rails and ERP systems, blockchain technology may offer a far superior solution.

Why blockchain is a superior solution for harmonising payments and invoices

Too much power for one company

Similar to many believing that Facebook has too much political power, one company controlling all invoice and payment data would give it far too much power in the financial services industry. 

Instead, blockchain technology allows businesses to process and store invoices and payments in a decentralised, private manner. That means that businesses and freelancers can part-own as well as participate in the network that runs and stores their invoices and payments.

While blockchains are transparent, users would still have complete control over what data they share and who they share it with, as all invoice and payments data can be encrypted. 

Similar to how accountants use open banking with Xero for bank feeds, invoice and payments data from a blockchain could feed into bookkeeping systems, or even fintech startups working to solve outdated credit scoring systems with more granular data sources like invoice settlement data.

Interoperability and removing accountants’ biggest pain point

One of the biggest pain points in accounting and finance is having different platforms containing crucial data closed off, and being unable to cross those siloed systems easily. Blockchain technology solves this problem by providing harmonised data access and formats which are controlled and agreed upon by all counterparties. 

This is in contrast to centralised companies such as Xero or QuickBooks Online, which control who gets approved on their app marketplace, preventing potentially competing apps from accessing their marketplace. Limiting competition limits innovation and in turn, hurts accountants by making it more difficult to develop new tools that better enable the flow of data across systems and workflows.

Automated audits, reduced fraud

Invoice fraud and debtor recoverability are a particular focus area for auditors. Auditors sometimes send clients’ debtors' letters, asking them to verify the invoice, and more commonly trace the post-year-end receipts to the bank.

However, if both the issuing of an invoice as well as the acceptance of the invoice by the debtor is recorded on an immutable blockchain, the auditor can be fully assured that the invoices are genuine and recoverable. 

Auditors can also rely on this high integrity data to automate many more tests such as the detailed analysis of debtor and creditor days. 

It’s not as complicated as it sounds

Blockchain technology can be complex and hard to grasp, but so were computers and the internet in the 1990s. Accountants don’t need to understand data architecture or cloud computing to use everyday applications, and neither will they need to understand blockchain technology in its entirety, before they use blockchain-enabled applications.

This tech is new, but adoption is growing - fast

Blockchain-powered invoice and payment networks are unlikely to become mainstream tomorrow. But they are growing, and fast. Auditors who pay attention to the rapid adoption of blockchain technology in B2B payments and invoicing will be better poised to serve potential clients in the growing Web 3.0 economy. 

Over 1,300 businesses now use Request Finance, with users growing on average by 18% monthly since it launched just over a year ago in 2021. Additionally, over $175m of invoices were paid in 2021 with 8,591 new businesses and users joining the platform. 

“As regulators around the world look to bring cryptocurrency companies and service providers under their purview, and new innovations in payments like stablecoins gain greater traction, we will see mass adoption within the next five to ten years”, says Christophe Lassyut, co-founder and CEO of Request Finance.

Admittedly these numbers are relatively small. However, the benefits are so compelling that the speed of adoption is likely to continue increasing exponentially. Personally, as a former auditor and accountant I’m very excited to see where this takes us all.

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