Blockchain is the trending term in banking and fintech. Almost daily, new startups are formed and industry veterans recruited to create a game-changing business proposition based on blockchain.
However, there are several questions that treasurers are asking: what is blockchain, what does it offer corporate finance, and is it time for treasurers to pay attention?
Blockchain is best known as the technology underlying bitcoin. Blockchain is what gives bitcoin its intriguing characteristics – the anonymity, the efficiency, the peer-to-peer communication, the independence from existing financial networks, etc. Everything we love about bitcoin is, in fact, why we love blockchain too.
The most interesting – and disruptive – opportunity afforded by the application of blockchain technology into finance is the ability to securely and efficiently exchange data and messages without intermediaries, a.k.a. peer-to-peer. Payments via blockchain would be cheaper, direct to the party you are paying, and secure as the distributed ledgers that support blockchain transactions have proven to be impenetrable.
The financial community is just starting to get their hands around how to leverage blockchain. Banks and SWIFT arguably have the most to lose, as many of their fees rely on the necessity to use existing channels to initiate payments to individuals or organizations. Not surprisingly, banks and SWIFT are also taking steps to improve their own payment offerings, with SWIFT just announcing an initiative to enable banks with better payment delivery mechanisms for cross-border payments. SWIFT and its member banks look to offer same day use of funds, predictable fees, and complete transparency of payment delivery.
Despite such a welcome initiative, fintech vendors still have a fantastic opportunity to make serious inroads within the international payments space. Costs remain high for urgent cross-border payments and banks’ need for documentation (e.g. for OFAC compliance) can often delay payment delivery by days or more. These are obvious benefits.
More than just lower costs
The real opportunity is what this increased payment efficiency offers for corporates who don’t move money enough today. So many treasurers have idle pockets of cash parked in multiple regions because it is prohibitively expensive and difficult to move money until a certain balance is built up. With blockchain, money will move more easily, lowering the costs and complexity of cash pooling. Idle cash in one region can be cheaply mobilized to where it is needed most or where it yields a higher return.
Coupling blockchain-enabled payment apps with virtual currencies, treasurers can also reduce foreign exchange costs – again, by reducing the role of expensive intermediaries. This not only lowers the cost of currency conversion (again, an obvious benefit) but more importantly offers easier translation into core currencies, minimizing the currency risk a treasurer must manage. This will be especially useful as corporates expand into new markets as they can bill in local currency but not be forced to take on additional currency risk for the business.
There are many other opportunities for blockchain in trade finance and remittance services which will interest others in the organization, making treasury a valued partner to leverage blockchain technologies for the company’s supply and customer chains.
Become a blockchain expert
Whoever the players, individuals and corporates who send payments, who exchange currencies, who remit documents to support a business transaction – they will see change and yield benefit as blockchain strives to eliminate the middleman and securely connect people/organizations looking to do business globally with greater efficiency and less cost.
So, is it time for CFOs and treasurers to care about blockchain? Not yet, but we are getting closer. In the meantime, it is a good opportunity first to educate yourself on blockchain technology and its impact, and then to establish yourself as an innovation leader. So, when blockchain does start to proliferate you are ready to lead your organization to achieve greater value.