Blockchain and Digital Invoice Finance — What’s Missing?
What is the most resilient parasite? Bacteria? A virus? An intestinal worm? An idea. Resilient … highly contagious. Once an idea has taken hold of the brain it’s almost impossible to eradicate.
— “Inception” (2010)
Similar to an idea in the movie “Inception,” blockchain has been imprinted on our brains as the solution for just about everything. But recently, a number of articles have taken a negative perspective on blockchain.
Now I for one am never about technology for technology’s sake. But let’s not throw the baby out with the bathwater. Distributed ledger technology really started ramping up only about 36 months ago. Considering that Amazon was still only selling books online after its first two years, why does blockchain have to change the world so quickly?
There’s no shortage of vendors that are developing invoice registries using distributed ledger technology to provide a level of confidence an invoice uploaded to their platforms is not fraudulent or has been double-financed. The thought is that blockchain can provide both a registry for invoice reference data and a dynamic database with updates on the condition of the invoice to promote finance from third parties. It’s all about using technology to de-risk invoice finance.
Below is just a sample of some vendors that see themselves as a managed service provider of the infrastructure to facilitate invoice finance:
- Seatig — currently developing an accounts receivable trading network based on blockchain for supply chain finance
- Trade Finance Market — provides a solution called Invoice Check built on the Ethereum blockchain that it claims enables consortium members across multiple continents to co-operate with each other — while ensuring data privacy and integrity
- INVIOU — a cross-network financial records registry based on distributed ledger technology. The vendor claims the registry enables financial institutions to provide safe and simple open-account financing.by diminishingfraud and friction.
- Bumo — a Chinese blockchain vendor with a supply chain finance platform built on BUMO infrastructure called Yinuo Finance, which currently focuses on account receivable financing for SMEs. Yinuo claims more than 100 core enterprises, 700 suppliers and 14 banks on board, and the overall value of financing asset exceeds $1.5 billion
Can Blockchain Really De-risk Invoice Finance?
In a recent post I did around invoice finance, I discussed the three stages where invoices can be financed. Of the three, financing at invoice submission by far carries the highest risk.
No one argues that blockchain technology is not sound, with data encryption, smart contracts and the like all built in. It’s not in the technology where things go wrong. Even in bitcoin’s case, the technology works, but the abstraction principle and the infrastructure around bitcoin to ensure both buy and sell transactions is where the fraud and bad actors have played, and transactions costs have been considerable.
In the past, I have argued that DLT could be a great way to improve the state-by-state implementations of the UCC lien registry and move to a single national, digital registry. But again, it’s not about the technology.
There are many issues with invoice finance beyond just putting information on a blockchain. What are you actually financing? Any fintech can upload an encrypted invoice hashed at source. Beyond ascertaining the invoice is not fraudulent or double-financed, you get into issues around what are your lien sources.
And even more important, what about dilution? You expect just because this invoice has been uploaded and sent to your platform that investors will fund it without considering buyer payment risk and dilution risk? Do you really expect buyers to sign contracts saying they will pay the invoice? That leads to all kinds of accounting issues. Also, do commercial laws recognize registries?
The goal to become the network infrastructure layer for global invoice finance built using blockchain to control and manage risk forgets that this is not just a technology problem. If it were, we may not be talking about small business funding gaps.