Can blockchain stop small-biz invoice double dipping?
Small-business projects in India and Latin America will provide a test of how well an open source blockchain can reduce the fraud that can occur when businesses try to free up capital from outstanding payments.
R3 will support MonetaGo’s fraud mitigation network, including the next deployment in Latin America with six banks at launch, and an existing network in India that will port over from Hyperledger.
The New York-based MonetaGo does not directly process payments, but handles data reconciliation across multiple parties. One of its functions is to combat fraud in receivables or invoice financing. Businesses receive a portion unpaid invoices from a bank that later collects the outstanding payment.
This market is adding automation to create an easier user experience that resembles consumer billing. That can attract more businesses, but it also adds fraud risk as some small businesses may repeat the process with multiple banks in a decentralized network, or double financing.
In concept, a distributed ledger such as a blockchain would be a natural fit to solve this problem. Payments involving complex workflows between competing institutions often create limitations to the possible interactions between parties that can be smoothed over by the collaboration with Corda.
“Any shared information is almost always funneled through third-parties such as payment gateways and until now this prevented higher functionality such as the digitization of workflows,” said Jesse Chenard, CEO of MonetaGo.
The first network deployed in India has the potential to impact all of the micro, small, and medium enterprises in the country, which has approximately 70 million businesses, according to Business Today in India.
“For invoice financing alone, this is already hundreds of billions of dollars,” Chenard said.
In India, where the first MonetaGo network was deployed, there are three government licensed exchanges: RXIL, A.TReDS, and M1xhange. These exchanges provide marketplaces for businesses to obtain financing on their invoices. These platforms count some of the biggest Indian banks and a number of foreign banks as funding sources, Chenard said.
“Importantly, because it is a blockchain network, it is not controlled by any single entity or third party capable of being manipulated, controlled, or otherwise influenced,” he said.
MonetaGo deployed its first blockchain in India in 2018. Chenard said data is shared on R3 Corda in a manner which is distinct from Hyperledger Fabric in that only the parties to transactions are able to obtain it.
“In Hyperledger Fabric, we currently achieve this by using hashing functions, however this has implications for the long term scalability. By its very architecture, Corda does not face the same constraint,” he said, adding some of largest institutions in the financial services space have now chosen R3’s Corda, removing potential friction.
Hyperledger did not return a request for comment. One of the potential hurdles for blockchain is cooperation among participants. It's that very nature of propriety that lends itself of double financing since banks are reluctant to share information.
The expanding bank participation in Corda will boost cooperation, Chenard said. Among potential partners for Corda are trade finance solutions such as Voltron and Marco Polo, as well as banks such as BNP Paribas, NatWest, HSBC, and Standard Chartered, Chenard said. ING also recently signed on for an unlimited number of Corda nodes, and Swift recently announced it is testing GPI payments through Corda.
What will help MonetaGo succeed is a secure infrastructure that makes it easy for financial institutions to send data to be analyzed and a machine learning platform that produces the best possible fraud analytics across multiple fraud vectors, said Tim Sloane, vice president of Mercator.
“From this perspective, MonetaGo should deliver to financial institutions any APIs they need over any communications channel the financial institution already has in place, which may indeed be R3 for some but certainly not all," Sloane said.
It is still the early days of blockchain and this is a niche application, said Al Pascual, a senior vice president of research at Javelin, adding there are multitude of vendors in the ecosystem that support network intelligence on fraud threats.
“The blockchain is another way to skin the cat, but more than anything it seems to open the door to more vendors rather than necessarily offering greater value," Pascual said.