Reinventing reconciliation with blockchain technology
An order goes out, an invoice comes in, and payment is made – what could be simpler?
Like many things in life, the theory and the reality don’t always match up. Returns, exchanges, disputes or credits for example, can complicate the billing and reconciliation process, increasing the time and effort involved in processing an invoice by up to 10 times.
The payments papertrail
While many business processes have become practically paper-free in recent years, sadly Accounts Receivables (A/R) isn’t one of them. Research indicates that more than two-thirds of companies still receive 80% of their invoices in paper format via the mail, and use a paper-based routing and approval process.
Not only are these processes inefficient, they are also ineffective. Surveys, a couple of years back, in GT News and Corporate Treasurer indicate that only 37% of corporates have an Account Receivables reconciliation rate of more than 80% and I doubt that this has changed much.
Needless to say, this is bad news for cashflow, and as account reconciliations are typically identified as a key internal control activity for Sarbanes-Oxley (SOX) compliance, it could also become a major issue in the event of audit.
Achieving a 90% reconciliation rate
Corporate treasurers are under constant pressure to improve efficiencies and gain better visibility and control over their global cash positions at any time of the day and anywhere in the world.
Effective management of account reconciliation activities would enable companies to proactively identify and resolve issues that could result in misstatements in financial accounting and reporting records and lead to substantial write-offs.
We believe it is possible to achieve a fully automated Account Receivables reconciliation process, including rejects and returns handling, and thereby increasing the straight-through reconciliation (STR) rates to more than 90%, to the point where minimal manual intervention is required.
The problem of incomplete information
Today the solutions offered by banking partners tend to involve customizing the corporates’ ERP to enable them to read and interpret information from the bank. But this process is slow and expensive, involving development on both the corporate and bank sides.
Essentially, the reconciliation problem is one of incomplete or unavailable information, exacerbated by the fact that secure information is being transferred between parties.
Because of this complexity, the capability to automatically retrieve and apply the relevant information to open Account Receivables remains just another long-term vision for many companies.
Solving reconciliation requires a new way of thinking
Accounts receivable processes haven’t fundamentally changed since the days of handwritten ledgers. Implementing a “Blockchain” solution for a corporate supply chain would actually be relatively simple and would avoid providing direct access to an ERP - and the subsequent security discussions that entails.
Blockchain technology offers the possibility to make complete remittance information available to all the parties involved in transactions, reducing the time and manual effort involved in payment reconciliation to minutes instead of days. How could this work in practice?
A corporate supplier could create its own Permissioned Blockchain where it and its buyers can store and retrieve relevant remittance information. The blockchain nodes can be authorized to allow companies within a supply chain to download relevant information to seamlessly match with the payment statement information received from the Bank.
Or alternatively, the paying company could create its own Permissioned Blockchain and allow the seller to pull relevant information only when needed – and without touching the back office ERP systems.
By speeding up the reconciliation process, corporates will gain better visibility and control over their global cash positions within their supply chain. They will avoid lengthy invoice disputes, reduce collection queues and be able to review credit lines more efficiently – and those are benefits which are difficult to ignore.