Will Blockchain Kill Invoices?
In the last two weeks, I’ve spent most of my time at the terrace of Parisian cafés, sipping one double espresso after the next, immersed in my thoughts and attempting to find an answer to a crucial existential question… Will Blockchain eliminate invoices?
You have no idea how stimulating those establishments can be on your brain. They’re still the crossroads of art, literature, philosophy, politics... and new technologies, maybe? From time to time, I’d raise my head and look around, wondering who was sitting at adjoining tables. A future president, an avant-garde poet, an artist, an anarchist, the next Vitalik Buterin? Who knows…
Today, a customer sends a purchase order to a supplier. The supplier approves the order and generates an invoice, which in turn is sent to the customer. Once the invoice approved, the customer commits to pay the supplier based on terms the latter has set. For most small and mid-size businesses, the purchase order and the invoice are exchanged electronically (in most cases as an email attachment) between the parties involved, and it is quite common that ultimately the document be printed out to facilitate the manual keying of the information in an ERP or an accounting system, prior to being manually filed. Structurally, the P.O. and the invoice are nothing more than forms with fields that need to be filled, so the purchasing/selling process can start and then complete. Moreover, the lack or in some cases the absence of automation each time business partners exchange a document considerably slows down the overall process, thus delaying the moment when payment occurs, which can greatly affect suppliers’ cashflow. Finally, misplaced and lost documents plus misinterpretation of the terms oftentimes lead to the emergence of claims, disputes, and legal action. Suppliers lose business and customers’ trust in their suppliers is eroded.
Naturally, there are cloud-based solutions on the market that automate parts of the process described above. Regardless of their format, purchase orders can be received and recorded seamlessly by whichever system in use on the supplier’s side, which in turn automatically generates an invoice that is electronically pushed to the customer’s ERP system. The problem is that some of those cloud-based solutions can be vulnerable, especially if they’re not bank-level secure and private or dedicated (one cloud per client). The cloud is indeed a centralized database with stored data that can be accessed via a web browser, and a web browser tends to be the gateway of choice for any hacker. Second, centralized databases offer four data functions: Create, Read, Update, Delete. Anyone with access credentials (database administrator, database architect, business analyst) can utilize the Create, Update and Delete functions to compromise data. The Read function is only as good as the data which is read. So, when you hear CTOs tell you they’re in the process of “moving everything to the cloud,” make sure they remain on top of securing their systems (like continually patching security vulnerability) and the data they store.
(e-)Invoicing with Blockchain
Now, how does the process look like when facilitated by a Blockchain network? First, both the customer and his supplier are participants in a private blockchain network, which means they each have their own node. The customer logs into the supplier’s Blockchain-based application and places an order. Pricing is computed, a delivery option selected, and the order submitted. The elements of the order are pushed to the Blockchain, and this action executes two initial smart contracts. The first one assigns a hash (or unique authentication code) to the elements of this particular order and a second smart contract is executed to verify whether the supplier has sufficient inventories. If so, a third smart contract is immediately executed to approve the order and automatically send an alert to the customer to confirm the operation. The execution of a fourth smart contract follows to initiate payment, based on terms previously agreed upon. In other words, there is no human intervention required. All the information pertaining to the order and its treatment are made available in real-time to the supplier and the customer, since a Blockchain network is a distributed system, which infers that all participant’s node stores the same data. This level of transparency creates trust among the trading partners.
So, does Blockchain mean that invoices are deemed to disappear? I guess it’s up to your interpretation of what an invoice is supposed to look like and the purpose it serves. What will certainly disappear is the need to generate an invoice for customer approval, since both the supplier and the customer will have initially agreed on the content of all the smart contracts involved in the process. Automation will indeed bypass this step, eliminating in the meantime claims, disputes and other dysfunctions. Therefore, invoicing a client will disappear. Now, in case an auditor or a financial analyst must access invoice-related data for reporting purpose, he or she will be able to export the information directly from the Blockchain and potentially complete it with information that is stored off the chain. Unlike data that is stored inside a centralized database, the information stored inside a Blockchain network is immutable hence indisputable, which will facilitate the reporting process and ensure its pertinence.
To Conclude: Should Your A/R Department Fear Blockchain?
On a human resource level, automation replaces manual tasks, which consequently eliminates all associated positions. Say goodbye to processing purchase orders and generating then sending out invoices. The Blockchain will do it all without human intervention. Also, say goodbye to disputes and claims. Smart contracts and data immutability leave no room for discussion and (mis)interpretation. On a productivity level, the Blockchain technology will revolutionize the way your accounts receivable department functions and will contribute to optimizing its performance, thanks mainly to three of its benefits: Immutability, speed of execution, and traceability.