Crypto-Commerce: Banking on Blockchain for B2B Payments
Editor's Note: This post was originally published July 29th, 2019 and has been updated for relevancy
After significant hype with the rise of cryptocurrencies, there was a ‘Blockchain winter.’ The predictions for rapid adoption by 2020 never materialized; however, the underlying technology, Blockchain, still holds promise, especially in the B2B payments space.
B2B payments have seen consistent growth for several years (40% in the US from 2014-2020). This trend is expected to continue with a CAGR of 21% from 2021-2030. With 88% of businesses believing that API technologies will affect payments the most over the next few years and 65% of companies preferring a single or integrated payments solution, the momentum could soon turn into a ‘Blockchain Spring.’
How Blockchain for B2B Payments Works
Blockchain’s foundation is distributed ledger technology (DLT). Transactions are distributed, with records verified by a network of computers versus by one party or bank, and visible to all parties versus held in a central database. They’re also immutable as once recorded, they cannot be altered, reversed, or tampered with.
When a buyer or seller submits payment information to the chain, a digital “block” is created and distributed to the network. Multiple computers compete to unscramble the block, and the first to successfully do so shares it with the network for verification. Verification includes confirming funds are available, sender and receiver are reputable, and the request is legitimate.
Once verified, the transaction is authorized and posted to the ledger and designated parties are updated in real time.
Blockchain Benefits for B2B Payments
Blockchain cuts central banks out of the process, dramatically speeding up settlement. Unlike banks, which can take up to five business days for cross-border transactions, the 24/7 availability of the network supports real-time to next-day fund transfer.
Blockchain’s transparency and automation also save both suppliers and buyers the manual processes of phoning or emailing each other and updating their respective records in multiple systems.
The ability to place one-touch orders directly from equipment and sensors on the job site, within a manufacturing plant or even operating room is an emerging opportunity in B2B. The “smart contract” property of blockchain supports automated device-to-device transactions when certain conditions are met, cutting out traditional invoicing and payment processes entirely.
Integrated with payment networks and headless commerce applications, smart contracts and IoT may be the future of replenishment and other micro-transactions between B2B buyers and sellers. Pricing and payment terms are set into the smart contract, with buyer and seller notified of each transaction upon execution and pushed back to their respective systems of record.
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Proactive Fraud Prevention
The public, distributed ledger serves as a “single source of truth” for both buyers and suppliers. While blockchain may not eliminate the need for outside verification agencies reduces settlement risk and makes it easier to track down fraudulent activities.
Prevent “False Positives”
For AR and AP departments, tighter fraud controls can lead to more false positives, increasing card declines for good accounts, delays in invoice processing, and can hurt the buyer-supplier relationship. Blockchain’s network-based verification and immutable record recognizes more good transactions and fosters trust between parties.
How Institutions are Already Banking on Blockchain
A Stablecoin is a digital currency pegged to a ‘stable’ reserve asset, like the U.S. dollar. These remove the significant volatility seen in more well-known cryptocurrencies like Bitcoin and Ethereum, which are tied to being ‘mined’ by computers. Stablecoins assuage some of the concerns over cryptocurrencies for business, though significant questions remain.
Legislation remains one of the unanswered questions that will significantly impact the future of these coins. Momentum continues to build towards answering these questions. As recently as December 2021, the U.S. Congress considered the regulatory path forward.
Visa, MasterCard and Amex are in an arms race to patent and ship new blockchain payment technologies. Their open APIs such as Visa’s B2B Connect allow fintechs and other financial institutions to build custom solutions and payment integrations on top of their respective blockchain infrastructure, including smart contracts and expedited payment settlement to enhance their B2B services.
The B2B Blockchain Challenge...and the Future
While banks and fintech companies are wasting no time embracing Blockchain, the challenge for B2B merchants remains to be the on and off-ramps (how they can turn good old dollars into digital coins with ease and low risk). Several fintech and ACH companies are attempting to solve these issues with B2B specific offerings.
We can expect that, as the blockchain market matures, banks and fintech companies will continue to open their infrastructure and APIs to third-party developers, including B2B merchants. Technology vendors may also begin to integrate blockchain technologies into their commerce solutions. Stripe, for instance, says it is still in “Early Innings,” there is no doubt the “winter” is thawing, and we will continue to watch as this space evolves.
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