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Blockchain: The quiet revolution for next generation SME businesses

First used with bitcoin in 2008, it has gradually grown in use as the technological underpinning of cryptocurrency. However, whilst interest in bitcoin has waned, blockchain has found more and more application in industries outside of finance.

Concerns relating to trust and risk are allayed by the very structure of blockchain. Often described as a digital ledger, it is actually a distributed database that supports a continuously growing list of ordered records called blocks. Each block contains a timestamp and a link to a previous block; all blocks are linked together and encoded using cryptography, so there’s no central point of failure.

One of its major benefits is that its structure offers protection in the growing battle against cyber warfare.

Because blockchain enables the recording of transactions between two parties efficiently and in a verifiable and permanent way, its use in financial services has helped to lower costs and reduce complexity, and, perhaps more importantly, it has had a distinct impact on improving transparency and regulation.

There are now, however, indications that blockchain could be set for further expansion in the corporate sector, and specifically in the SME community.

A two-year research project outlined some of the advantages including a global searchable database of all transactions that would dramatically lower the costs of search and smart contracts (software programs that self-execute complex instructions); blockchain used to plummet the costs of contracting, enforcing contracts, and making payments; and support for reputation systems built on social and economic capital and controlled by individuals, rather than by intermediaries like rating agencies and credit rating services.

All of this sounds very exciting, but these potential advantages have set off alarm bells in some corporate sectors, including accountancy, finance and credit management, all of which are essential to SME operations.

Credit managers are concerned that the structure of blockchain technology will provide all the security needed for credit transactions, thereby reducing their role. Accountants and financial department heads are more focused on disruptions to the traditional accounting methods of invoicing, payment processing and contracts.

The fact is that technology is already forcing change on traditional SME business roles. The finance function in any organisation will have to re-evaluate its offer to the company and to the company’s customers and gain a better understanding of how it can add value in the quickly evolving ecosystem, much of which is influenced by digital technologies.

One of the biggest issues for SME growth has been access to affordable funding schemes. Banking processes are onerous and high interest rates demanded in order to off-set the risks of SME’s defaulting on repayments are off-putting for many. SMEs cannot always provide the necessary level of assets that could act as collateral to secure loans, so they struggle to gain funding, just when they most need it.

Blockchain technology, by comparison, creates financing opportunities through syndicated lending. Loans can be tokenised and traded, which provides liquidity to an otherwise non-liquid asset and minimise lenders risk by dividing the loan into smaller parts. This was illustrated earlier this year in a joint venture between fintech and analytics provider Ipreo and distributed ledger technology Symbiont. Known as Synaps Loans, it”have created and tested a working blockchain solution for servicing syndicated loans.

This type of development, and many others, could have a significant impact on SME businesses, so it would be a very unwise finance director or credit manager who dug their heels in the ground in favour of more traditional practices.

Finance professionals must now compete on a new stage when it comes to the role they play in SME businesses. They could research blockchain and oversee new digital developments, offer more strategic financial advice, and deliver real-time information about the financial landscape, highlighting any area of risk and details on the markets that their companies are working in.

Progress is inevitable, and blockchain digitalisation technology will be part of financial practices moving forward. As this is a “quiet revolution”, it is unlikely to happen quickly, but will instead be a gradual process in which collaboration will need to be facilitated between accounting, audit, credit management practices and technology providers, so that digital and operational transformation can take place and SME’s can benefit and grow.

Michael Feldwickis head of UK and IrelandAt Tinubu Square



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