What if everyone involved in a financial transaction could share the same ledger—and it was always up to date? No need for reconciliations, with simultaneous settlements immediately available to all participants, and instant visibility into accounts receivable, the supply chain and virtually all relevant transactions.
Formally, blockchain is a digital ledger technology (DLT), which focuses on recording and storing transactions of any type in a shared platform.ISTOCK
Indeed, what if there was just one, unimpeachable version of the truth? That is the promise of blockchain technology.
While blockchain is often mentioned in conjunction with cyptocurrency platforms like Bitcoin, the underlying technology goes way beyond those nascent digital currencies. Formally, blockchain is a digital ledger technology (DLT), which focuses on recording and storing transactions of any type in a shared platform.
What Is a Blockchain?
As the word suggests, a blockchain is a series of connected blocks, or boxes. Each block contains data involved in a specific transaction. As each transaction occurs, it is stored in a block and added to the chain. Together, the blocks form a distributed database that can hold a growing number of records—a blockchain.
But unlike a traditional database, in which information resides in unique repositories across multiple partners and must ultimately be reconciled, the distributed blockchain database creates a single, shared digital ledger.
To protect the integrity of data, each block must be validated by every participant and secured using electronic cryptography. Changes cannot be made without the approval of participants. Think of it as having a notary there to verify every transaction. This chronological chain of transactions thus provides a single source of secured, up-to-date information that all authorized parties can share.
For a quick explanation of how blockchain works, read Blockchain and the Future of Finance.
A Finance Windfall
The potential benefits for CFOs and their finance teams are compelling: New levels of data transparency, faster access to information and features like “smart contracts” will bring significant changes to financial operations. Among other things, the recent report from KPMG analysts identified the following benefits:
Increased efficiency: A single ledger that’s continuously synchronized throughout a network eliminates the need for reconciliations. KPMG research suggests as much as a 40 percent increase in efficiency due to straight-through, “single version of the truth” processing.
Reduced loss and fraud: Immutable records visible to all participants may improve data accuracy and security. This can help reduce the risk of fraud and show compliance through an audit trail.
Improved customer experience: Using blockchain to share information with clients and vendors may allow companies to serve customers more quickly and even find new sales opportunities. KPMG research predicts a 25 percent improvement in customer experience due to faster processing and use of digital channels.
Higher availability of capital: According to KPMG analysis, blockchain technology will reduce capital consumption due to quicker settlement of trades, straight-through processing, and and freed-up capital flows.
A New Future for CFOs
Blockchain is also going to have significant impact on financial operations. The KPMG analysts who have been studying the technology anticipate these key trends:
Work with existing systems: Blockchain will not replace current ERP systems overnight. However, it may take time to fully realize the benefits of blockchain's real-time view of data.
Go private, then public: Finance organizations will start with private blockchains to retain sensitive data, but could eventually add permissioned blockchains for industry partners and even customers.
Mind the regulations gap: It's going to take time for government regulators to understand the technology and its decentralization of financial activities.
Evaluating Blockchain for Your Business
Blockchain will have a big impact on core processes: Quote-to-cash, source-to-pay, and acquire-to-retire processes will all be affected.
But blockchain is not the latest new cure-all. It’s important for CFOs and executive leaders to address a number of questions about when and how blockchain implementation makes sense for their businesses, including:
What types of transactions are best handled by a blockchain technology?
What kind of infrastructure or new equipment will be required?
Who will manage a blockchain and new participants?
How can blockchain technology improve risk management?
What are the regulatory implications?