Cryptocurrencies have moved from a speculative asset to a practical one. One area in which crypto can serve and improve is the current business-to-business (B2B) payments space.
In a recent PaymentsJournal podcast, Daniel Artin, Vice President of Strategic Partnerships at Boost, and Elly Aiala, Chief Compliance Officer at Boost, joined Steve Murphy, Director of Commercial and Enterprise Payments Advisory Service at Mercator, to discuss how businesses should consider adopting blockchain technology, and specifically, stablecoins, to ensure transparency, traceability, and security in their B2B payments.
Current State of B2B Payments
First, let’s set the current state of B2B payments. Even with all the innovation that the payments space has witnessed in the last few years, B2B payments are still fraught with problems.
“This niche of payments in the market is littered with pain points,” said Artin, “primarily due to costly fees, late payments, poor management of data, inaccurate data entries, and oftentimes lack of education in the marketplace around innovations to solve these problems. Buyers and suppliers are used to delayed payments [and] frequent disputes amongst one another, and there is a status quo of distrust that occurs amongst commercial trading partners. Since the B2B payments space is a trillion-dollar addressable market, we believe this a large ramp for digitization.”
Artin blamed inertia for the lag in adopting new ways of accepting B2B payments. Many businesses continue to use legacy systems implemented decades ago despite their inefficiencies.
And organization leaders are not keen on taking a leap into the unknown. “A lot of CFOs and treasurers looking to optimize payments are risk-averse and naturally so,” added Artin. “You’re taking systems, processes, and workflows that have worked for 60 to 70 years and now asking [business leaders] to migrate that to a new digital form that you may not fully understand or know.”
Cryptocurrencies are still shrouded in mystery, which is why they need to be unpacked to reveal how they actually work and to discuss successful use-cases.
But before diving in, let’s tackle the challenges surrounding cryptocurrencies today.
U.S. Regulation: A Stumbling Block to Adoption
You cannot begin a conversation about cryptocurrency without mentioning regulation. Regulation has been ever-present since the popularization and growing adoption of cryptocurrency began.
“Our [U.S.] approach to cryptocurrencies and other technologies in this space has been picking up speed,” said Aiala. “But it is very much in development and exists primarily as a combination of both enforcement and draft legislation and frameworks. This impacts institutional adoption. In order to know why the U.S. regulation is where it is today, you need to know what cryptocurrency and blockchain technology is doing to the existing financial infrastructure.”
Aiala used the analogy of gathering the world’s best soccer players to play a game without rules or compliance. The result is that the game will not function safely or efficiently. The current referees, or two regulatory parties, competing to earn the position of top regulator for cryptocurrencies are the Commodity Futures Trading Commission (CFTC) and the U.S. Securities and Exchange Commission (SEC).
Aiala asserted that without historical knowledge and experience using crypto and blockchain technologies, it is difficult for policy makers to create regulations that will endure the test of time. Technology, as well as its use cases, is never static but always changing.
The way around all the fear, mistrust, and misinformation is for leaders in the crypto space to stay diligent in educating policy makers, informing them so that the appropriate regulatory frameworks can be developed. It’s not only about growth and innovation in the crypto space, it is also about ensuring that end users are safe in using this technology.
Although change is coming and more policy makers and consumers are being introduced to this new financial technology, the current lack of official rules keeps many institutions from adopting crypto.
Why Replace Legacy Systems with Blockchain Technology
There are many benefits for companies to incorporate and replace their current infrastructures with blockchain technology. These include transparency and traceability, consensus mechanisms, security and audit, and smart contracts.
With transparency and traceability, businesses would have the advantage of having all participants within the network see the data as they are updated in real time.
Also known as consensus protocols, consensus mechanisms would allow businesses to verify transactions and ensure the security of the blockchain or protocol.
Blockchain is incredibly secure, making accounting and auditing a breeze and eliminating human error. Blockchain also ensures the integrity of its records. Another important factor is that the ledger is immutable. No one can change a transaction after it has been submitted. This includes record owners.
Smart contracts are programmatic rules that can be carried out automatically within the blockchain after certain rules are met.
“We live in a world where buyers and suppliers have established pre-negotiated commercial trading terms,” added Artin. “Aside from contract penalties, early-pay discounts, [or] trade financing, there’s no way to enforce these rules blindly by buyers and suppliers. Hence the disputes. But with smart contracts, these conditions and terms can be programmed, and automatically fulfill those obligations across both parties on their behalf automatically. It’s touchless, it’s automatic, and it instills a newfound level of trust among parties that otherwise [was] not there.”
One significant use case concerns Walmart Canada, whose shipping fleet of 2,500 produces a whopping seven billion invoice permutations annually, and of which 70% of freight contracts resulted in disputes. When Walmart Canada implemented blockchain, invoice disputes dropped to below 2%.
“Our research goes back five to six years, and one of the earliest use-cases we identified for blockchain was international and domestic trade,” Murphy said. “It’s [blockchains] really getting rolled out quickly. International trade and the use of smart contracts is a bright use-case.”
Looking Ahead for B2B Payments
The use and adoption of cryptocurrency are still at an early stage. And businesses are certainly not clamoring for adoption either. What we do know is that blockchain has the mechanics and infrastructure necessary for businesses to vastly improve the current state of B2B payments.