Advanced Computing in the Age of AI | Thursday, May 30, 2024

Blockchain Breaks into Enterprise Finance 

(Apoint via Shutterstock)

Today, enterprise finance professionals are looking to blockchain as the next key disruptor in payments technology, making headlines for its benefits in eliminating redundancies in cost reconciliation and closing the books faster.

However, many CFOs are still struggling to understand exactly how blockchain can be used in the enterprise to unlock the full potential of investments. With the World Economic Forum predicting that blockchain will store 10 percent of the world’s GDP within the next decade, now is the time for finance professionals to get up to speed on the power of this new technology.

Blockchain is a type of distributed ledger framework that works by posting transactions in real-time as cryptographically unique “blocks,” visible to all permissioned users. These blocks cannot be reversed or changed, with new additions to the ledger posted on top of the register of existing transactions. With no central authority – such as a bank or any other central institution – responsible for managing and authorizing these transactions, the accuracy of all records is “crowd”-verified by all users on the chain and has the potential to provide frictionless transactions based on that distributed trust.

While much blockchain hype stems from the use of bitcoin, blockchain as the game-changing “trust protocol” has many more potential applications within the enterprise as a platform for financial leaders.

Streamline settlement and reconciliation activities

Henner Schliebs of SAP

Traditionally, transactions between enterprises must be regulated and facilitated by a central governing financial institution. With blockchain for the enterprise, this middle-man is removed from the equation and payments can be directly sent to and from the involved parties – allowing transactions to be posted in minutes, rather than days. This offers major competitive advantages by allowing for more liquid movement of capital, which is critical for enterprises today.

Additionally, because blockchain transactions are recorded simultaneously across all copies of the distributed ledger, coordination of recognition and settlement activities among accounting teams becomes significantly easier. Redundancies in record-keeping are eliminated, while still maintaining a comprehensive audit trail across the distributed transactions.

Blockchain can also be used to generate “smart contracts” that can further streamline transactions. With a smart contract, provisions are converted into bits of code in the blockchain. Collateral can then be held within the ledger and exchanged automatically and directly between parties upon the contract’s execution. This simplifies the reconciliation process by ensuring that transactions are carried out accurately and efficiently in accordance with specified provisions, particularly those involving multiple systems or departments. As the speed of business continues to increase, this technology will allow enterprise finance teams to keep up with a global set of transactions and close the books faster.

Increase the security of financial transactions and reduce payments fraud

With cybersecurity top of mind for nearly all enterprise leaders today, one of the most widely discussed benefits of blockchain is the increased security it can provide. When transactions are made and new blocks are added to the chain, each block is assigned a unique hash, or string of numbers, that represents a set of data. Hashes are an extremely secure way to store data, often used to secure passwords or transmit sensitive information, such as credit card digits. By tracking and tracing transactions through hashes rather than the data within the records, blockchain ensures that records cannot be deleted or altered, since it is essentially impossible to turn a well-designed hash back into its original text string.

Blockchain offers added security benefits by ensuring the accuracy of financial transactions. Because each transaction is monitored and approved by all the users within the ledger, it is extremely difficult to commit fraud, as all users will see the fraudulent activity occurring in real-time. Rather than only seeing the finalized version of the ledger, as is the case with today’s legacy ledger systems, all users will see exactly how updates to the transaction register were formulated, making it easier to spot fraud taking place.

Additionally, blockchain can guarantee data redundancy by reducing the risks associated with a singular point of failure. As seen in the case of many recent cyberattacks, if an asset under the control of a sole administrator is compromised, it can have devastating effects on the entire system. But with a blockchain structure, the ledger is distributed across networks, therefore there is no privileged administrator who can be compromised – resulting in significantly less risk of a compromise of the entire system. This certainly makes sense in cases of multi-party interactions with no legitimate or efficient single authority.

Drive innovation through advanced insights and analytics

Within the enterprise, blockchain offers a critical opportunity for finance professionals by offering advanced insights into financial transactions. As the ledger is shared between users and updates are posted in real-time, CFOs are tuned in to the end-to-end movement of transactions through the system. This enables CFOs to perform advanced reporting using predictive analytics, and better analyze the forces behind market trends.

While blockchain has many potential benefits for enterprises and finance professionals, it is important to note that the theory behind this technology is still well ahead of its implementation. Finance executives must implement blockchain in scenarios that make sense to yield a high ROI: manual, slow and error-prone processes versus simple, one-to-one transactions; high transaction fees versus value-add, and so on.

A new survey by Oxford Economics indicates that only 7 percent of finance executives currently rate blockchain as an important core technology to their finance function’s successful performance. While that number will increase in coming years, adoption is still slow. As with any new technology, early adopters will uncover many unforeseen challenges. However, it is also those enterprises that take advantage of this technology that will be first to see the benefits. In any case, it is critical for finance teams and business leaders to gain a strong grasp on the theory behind blockchain so that they are prepared to embrace it, when the time is right.

Henner Schliebs is a global vice president at SAP.