In the business-to-consumer space (B2C), most of us have enthusiastically embraced the speed and convenience of digital payments vs. writing a check.
The same can’t be said for the business-to-business (B2B) world.
In fact, just over half of B2B payments in the U.S. are still made by paper checks. These are a tempting target for crooks, with 75% of companies surveyed by the Association of Financial Professionals reporting actual or attempted check fraud. Checks also slow down the payment process, especially for smaller companies with cumbersome accounting systems that make it difficult to issue invoices on-time and track outstanding payments.
Using electronic payments, such companies can more easily define payment terms with customers, provide incentives for early payments, send automatic payment reminders and pass on transaction fees to customers.
Many businesses still rely on checks because of the difficulty they experience when seeking complete, validated electronic payment information about suppliers. Add to this the fact that remittance details aren’t physically linked to payment details, as they can be with a check, and the reluctance to embrace digital payments grows.
B2B payers and payees have discussed this problem for more than a decade. The drive to solve it with a new, interoperable B2B directory moved into high gear in fall 2018 when electronic payments association Nacha acquired the Business Payments Directory Association. The latter had already defined the requirements for a solution, which included more open and interoperable directories that would make it far easier for payers and payees to find reliable information about each other.
At the same time, awareness was growing that distributed ledger technology (DLT), the critical infrastructure that powers blockchain networks, was a strong contender to meet these needs.
With Discover Financial Services and Cognizant, Nacha is now deeply involved in examining how DLT and smart contracts can enhance trust and reduce the cost and delays of online B2B payments. This work was done under the auspices of the Nacha Corporate Experience, a program that dem- onstrates how bringing advanced technologies and financial industry standards together to create an evolving suite of products and services can improve every aspect of the B2B payment process.
How we settled on blockchain as the foundation for Nacha’s Business Payments Federated Directory (BPFD), and how we plan to implement it, hold valuable lessons for any enterprise investigating the ability for blockchain/DLT to meet modern digital business requirements.
Business needs first, technology second
One of our biggest takeaways was the importance of starting with a business challenge or opportunity and then seeking technology that can support it rather than the opposite – starting with an intriguing new technology and finding a use case for it. Through this approach, we ascertained that a permissioned, private blockchain network would be the best foundation for creating a B2B directory that would help partners work in a safe and trusted way.
This includes providing secure registration of their confidential payment information, such as account numbers, preferred payment methods, and credit card and wire payment information.
A B2B directory could improve the supplier experience by eliminating the need to register with multiple directories while also allowing for more closely controlled access to payment information. Such interoperability would enable multiple credentialed service providers (CSP) to link their own directories and share information with each other. The environment would also enable all parties to:
- Specify their preferred payment method.
- List multiple payment types and the information required to allow companies to utilize them.
- Provide secure access to confidential information about payers and payees.
- Rely on a trusted source for routing and remittance information to reduce risk and ensure compliance.
When we first looked at creating such a directory, we considered a centralized database design. But the need for encryption and privacy, as well as for decentralizing sensitive data to avoid creating a “honey pot” for hackers, made blockchain the obvious choice. The directory’s use of hashes stored on blockchain to validate the integrity of buyer and seller data helps assure that payers and payees receive accurate and up-to-date information. By adding smart contracts executed on blockchain, we can control access and update rights, and automatically inform all authorized users of changes to the data.
While there’s been much speculation about using blockchain for funds transfer, we believe it’s equally applicable to the prepayment phase because of the technology’s innate ability to verify and share partner credentials through a highly protected directory.