A vital part of strong business relationships is trust. Trust between businesses promotes loyalty as well as synergy, leading to smoother business operations, increased revenue, and, last but not least, fewer headaches.
When that trust doesn’t exist, however, it can be disastrous — particularly when it comes to business-to-business (B2B) payments. Not paying invoices on time or even fraud (intentional or not) are two quick ways to erode that trust.
In this blog post, we’ll cover just how damaging a lack of trust can be, how traditional payment systems can enable that mistrust, and how blockchain-based payment systems can strengthen B2B relationships.
Net 30 and net 60 are common terms among business-to-business contracts, meaning that the purchaser has that many days to pay the outstanding invoice.
But even with those long payment windows, about 15% of B2B receivables are overdue, according to a report by PYMNTS and American Express. Of that 15%, most are acting in good faith, so why are there so many late payments?
When working with traditional payment processes, it can take multiple approvals across departments to initiate a payment, which can take weeks. And once initiated, that payment can take up to 5 business days to show up in the vendor’s bank account.
If these roadblocks slow down payments to the point that they’re settled past the agreed upon term, it can put a liquidity strain on the vendor. It may be difficult for it to shoulder that loss of revenue, even if it’s temporary. Some businesses, especially small businesses, have to then borrow money to cover the gap.
Part of the cause of these problems lies within the manual processes many businesses are still using, as well as transactions having to pass through several intermediaries before the payment arrives at the payee’s bank account.
These situations definitely do not lead to good B2B relationships. In fact, they can breed mistrust, disloyalty, or even sever the relationship entirely.
Fraud is another pain of traditional payment processes. According to one study, 74% of organizations reported attempted or actual B2B payments fraud in 2020. Fraudsters manipulating invoices to redirect payments to themselves is one type of fraud that’s common, and most B2B payment fraud is made possible by complicated pen-and-paper processes. The same study also found that physical checks are the top target of fraud, as they often pass through many hands.
Even if a party outside the business relationship committed the fraud, it can lead to doubt. “How will they ensure this doesn’t happen again? What in their processes caused this fraud? Why didn’t they catch it?” These are valid questions that can make one business understandably wary of working with another.
Blockchain’s Answer to Settlement Delays and Fraud
Blockchain is an alternative to centralized trust models like banks, clearing houses, and government institutions. As a distributed ledger, a blockchain is an expanding, chronologically ordered list of digitally signed and immutable transactional records shared by all participants of a network.
What this means is that the blockchain itself can be the single source of truth. Because of this, no intermediaries are needed to verify transactions, which makes for much faster settlements while also fostering the trust needed for B2B payments.
Because blockchains have an immutable history that updates with every transaction, both sides of a B2B transaction can see each step of the payment process. The parties involved can be rest assured that what they’re seeing is current and correct, as the data cannot be manipulated once on the blockchain.
The immutable aspect of blockchain transactions also lends itself to preventing and spotting fraud. Data on the blockchain can’t simply be edited; once it’s recorded, it can’t be changed. If there does happen to be a case of fraud, either deliberate or due to error, it can easily be spotted in the recorded trail of immutable records.
With manual processes and payment records scattered across systems and desks, it can be hard to keep track of it all. With a blockchain-based payment solution, full records are recorded onto the blockchain itself and can easily be verified.
Both sides of a B2B transaction being able to see everything in one place can also improve business relationships. No longer will there be questions of if the invoice was paid, how much was paid, or when it was paid.
This can be of tremendous help to auditing procedures as well, as everything associated with the transaction is stored in one place.
Smart contracts can build trust and increase payment speed even more. A feature of blockchain, smart contracts can make a variety of business processes faster through automation. For a B2B payments use case, they act as a type of escrow, executing a transaction — whether that’s monetary or the release of goods and services — once predefined conditions are met. The whole B2B payment process can even be automated with smart contracts.
For instance, rules can be created in the smart contract so that if a purchaser orders a widget from a vendor, the invoice is automatically sent to the purchaser, speeding up the process from start to finish.
The mistrust made possible by traditional payment systems and manual processes can be repaired. Modern, blockchain-based payment systems can help B2B relationships through blockchain’s built-in, automated trust.
What Relevantz Can Do for You
To get your organization started with blockchain, Relevantz can conduct a Design Thinking Workshop in which we show a demo of our accelerators and prototypes and identify use cases that fit your needs.