Build on Blockchain? Middle Market Finance Could Find Success

By Rick Burke, Head of Corporate Products & Services, TD Bank

While the term blockchain may conjure visions of The Matrix, the distributed ledger technology is slowly being incorporated into the finance operations of several companies. Although some middle market firms have been early adopters of distributed ledger technologies including blockchain, there is still disagreement – and confusion – about its best use cases. The terminology itself can be unclear: While all blockchains qualify as a distributed ledger technology, not every distributed ledger is a blockchain.

A survey conducted by TD Bank at the 2018 Association for Financial Professionals Conference demonstrates this uncertainty. Survey respondents, which included corporate treasury and finance professionals, are almost evenly split on the top impacts of blockchain, although 90 percent agree this technology will have a positive effect on the payments industry. When it comes to the technology's top implications, respondents are divided: 29 percent think blockchain will create stronger audit trails; 22 percent said it will speed up payments; 21 percent believe it will improve efficiency of cross-border payments; and 18 percent stated blockchain will reduce fraud.

Blockchain has several applications for middle market companies, from communicating with their financial institutions to negotiating contracts. Most of these operations currently are done manually, which can leave room for lost or deleted files and copies along with delays from mail delivery or scheduling in-person meetings for signatures

Reducing these time-consuming processes is one way businesses benefit from blockchain. Because blockchain adds new data as "blocks" secured by cryptography, each entry or change during a contract negotiation leaves a "breadcrumb" of information that must be validated by all parties. Using this method creates a chronological record of activities and adds efficiency because participants can work simultaneously.

Reducing Risks, Faster Transactions

TD's survey also revealed a challenge: Faster and real-time payments are coming soon, but organizations still have obstacles to implement them. One is not having the technology or capital resources to support these transactions. Another growing concern is payments fraud/cybercrime. In fact, 44 percent of corporate finance professionals named fraud as their top operational challenge, up 14 percent year-over-year.

As more middle market companies rely on electronic financial records and transactions, it is no surprise that fraud and cybercrime are growing concerns. Enter blockchain: Preventing fraud is an area where distributed ledger technologies could benefit commercial finance. While no financial transaction (paper or electronic) is ironclad, blockchain leverages cryptography and requires many parties to agree to something before it occurs – say, moving money from a bank account to pay a vendor or to fund a foreign trade. The multiple approvers requirement and the cryptographically secured result can make it more difficult for fraudsters to socially engineer scams because they would need to impersonate several parties, while the technology itself can limit the ability of hackers.

Blockchain's biggest benefit, though, is that it provides a "single source of truth." Whether used for data collection and distribution, tracking contracts or sending payments, blockchain offers consistency of records. With more time and deeper knowledge, middle market executives will find that this "techie" concept offers a tangible boon to business.