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How blockchain is helping SMEs

Jane Galvin, Head of Corporate, at HSBC UK on how distributed ledger technology is leveling the playing field between businesses and industry juggernauts

Jane Galvin
|Jun 27|magazine14 min read

You’d be forgiven for thinking of cryptocurrency when you hear the word blockchain. However, it has come a long way since its inception in 2008 as a public transaction ledger for Bitcoin. At the core of every blockchain is Distributed Ledger Technology (DLT).

Originally built to underpin cryptocurrency exchanges, it has now evolved into one of the world’s fastest-growing and most publicised technologies with the potential to reshape our economy and society in ways not seen since the advent of the internet. 

With so many powerful benefits, organisations large and small are clamouring to take advantage of this innovative technology to give their businesses a competitive edge. But what exactly is Blockchain, how can it impact your business and is it too good to be true for SMEs? 

Back to basics

Perhaps the most well-known use of Blockchain is the sending and receiving of payments to anyone in the world. However, Blockchain has much broader applications and the benefits for small businesses extend far beyond just providing a secure payments platform. Blockchain is creating new opportunities for businesses in every sector to solve existing challenges and develop new business models. 

The technical definition describes Blockchain as a distributed database designed to facilitate transactions and keep track of assets. But the best way to understand this is to imagine a massive, virtual spreadsheet, duplicated across multiple computers, or nodes, which are all connected to each other forming a chain. When you add to the spreadsheet, each copy on the chain gets updated with a timestamp, making it almost impossible to tamper with. 

Smart contracts

One of the biggest universal challenges plaguing small and medium size businesses is cash flow. In fact, recent research by We.Pay found that more than 40% of businesses reported cash flow issues within the last year. 

Blockchain promises to solve this problem in the form of ‘smart contracts’, which as their name suggests, not only automate agreements but also enforce contracts between customers and suppliers. Think of a smart contract as a self-executed, coded agreement that delivers guaranteed outcomes if certain preconditions are met.  

This will potentially make life significantly easier for businesses. Creating frictionless and efficient transaction processes and allowing invoice payments to be done more quickly and without the need to chase for payment.

Decentralisation and security

Another advantage of Blockchain is the security benefits it provides. Blockchain applications are inherently decentralised, meaning that data is distributed to different computers around the world in parallel. Transactions cannot be manipulated or deleted through a cyber-hack because each transaction is linked to the one that preceded it. 

With cybercrime costing small businesses across the UK an estimated £13.6 billion in 2018, and four out of five companies in Europe experiencing at least one cybersecurity incident over the past year - this couldn’t come at a better time. 

Supply chain management

Blockchain has the potential to help SMEs build smarter and more secure supply chains. Since most products are not made by one single company, a Blockchain-backed supply chain means that each transaction from point of origin to point of sale can be tracked through a transparent and traceable audit trail with real-time visibility. 

This not only helps reduce fraud as mentioned but also improves inventory management, which has traditionally been a complex and laborious process, especially for small businesses. 

Not if but when?

HSBC UK supported the first transaction on the blockchain supply chain finance platform we.trade last year. Our client, Beeswift Limited and its corporate buyer in the Netherlands participated in the transaction. Use of the we.trade platform allowed Beeswift to complete its trade finance transaction within a day, rather than the average 40-45 days it traditionally takes. It was the first transaction where two buyers used the system end-to-end, including the ability to write the invoice, agree to trade terms, provide the online letter of credit, know as a bank payment undertaking (BPU), and additionally receive funding from that.

Blockchain has the potential to answer a number of issues businesses encounter; payment transparency, supply chain issues, cybercrime and a lack of necessary information to conduct business efficiently. 

However, businesses need to be cautious. Blockchain and its potential benefits are well publicised but like all new technologies its benefits, applications and limitations are only just beginning to come to fruition. Businesses need to question whether Blockchain truly answers the challenges the business has. 

First and foremost, you need a peer network to use Blockchain otherwise it is obsolete. For instance, in a supply chain each component supplier of a particular product would need to be in the chain for the company that assembles and markets the final product. 

The cost of data centres, electricity and servers that need constant upgrading may be a barrier to entry for many businesses. Whilst Blockchain may sound like a simple virtual solution they use a significant amount of energy as it constantly updates. Although it is improving, this isn’t currently a ‘green’ business solution.

It’s very easy for Blockchains to become too big, too quickly. Any changes to the Blockchain needs to be thoroughly tested and mirrored across every part of the chain otherwise it can blow out. Blockchain is a sequential chain of blocks or data records, that contain transactions, files or other important data.

When you try to then cut that into more controllable slices it isn’t always possible and it doesn’t eradicate the cyber-crime risk completely. Each slice could provide an opportunity for fraudsters to hack into the system.

The process of adoption will be slow and steady, and there will be setbacks. Nonetheless, Blockchain is at a tipping point, and for those willing to accept decentralisation as the future of business, it could solve many of the fundamental challenges SMEs experience on a daily basis. And it could level the playing field when it comes to competing against larger enterprises. Much like the infrastructure that supported the roll out of the internet, Blockchain is less a ‘disruptive’ technology than a ‘foundational’ one.

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