Payment cycles, inconsistent transactions, and complex settlement processes are a few of the biggest challenges in settlement processes today. Trade is the lifeblood of the modern global economy. Thousands of small transactions pass within and between organizations each week. Trust between partners is crucial in business. A solution built on Hyperledger Fabric can replace escrow services and make finance departments much more efficient.
Hyperledger Fabric for financial settlements
Table of contents:
How current settlements work
As the numbers of transactions and partners in the business network grow, existing systems get siloed. Paper-based solutions are not scalable for multiple stakeholders in a network. Every step introduces new bottlenecks and increases the risk of error. In the example diagram above, you can see that these operations related to settlements are not transparent to each stakeholder in the network, which complicates business processes, builds confusion, and generates a lot of paper documents.
Each balance requires current states and regular updates with each partner in this network. This process is complex because we have to use several connections and middlemen. Stakeholders have to confirm and settle each transaction separately, which adds to the chaos.
How settlements could work
Business leaders want to improve many processes to meet increasingly rigorous trading risks. Additionally, each company wants to reduce the cost of these transactions. There are many opportunities to do this. Companies bring cutting-edge technology such as integration processes based on APIs to improve internal and external processes but still, these companies have problems with business trust and effective transactions using accurate data. Companies look for an environment where collaboration can be faster, cheaper and more secure.
Let’s look at the second diagram above. This high level architecture shows a project based on a central backend system with a traditional database and API communication. As we can see collaboration between parties in finance transactions is based on the central system. This flow reduces too many connections between parties in the network compared to the previous diagram. We can store all information in the central system about settlements between partners in real-time in the network but still, we have a problem with potentially manipulated data and a single point of failure. We can’t trust this data.
Hyperledger Fabric for financial settlements
Our collaboration with many companies and deep knowledge of blockchain help us to build blockchain-based projects. Above you can see a diagram for a system we propose. The architecture looks similar to the previous diagram but we swapped the traditional IT backend for a distributed blockchain network where each country is a node. Each node confirms transactions using a consensus algorithm. This type of project gives firms a neutral place to keep a record of financial transactions and account balance that no one member of the network can control or change. All members have to agree — through consensus — on edits to existing entries as well as any new entries.
Using Hyperledger Fabric as a blockchain with smart contracts we can save the current balance after each transaction and generate an invoice per one a month with the current balance. We don’t have to this manually we can use immutable account balance saved on blockchain and do this automatically with smart contracts. We can reduce the number of invoices and commissions for transactions during the specified period and manage better finance settlement workflow.
Distributed ledger technology includes blockchain and smart contracts. Therefore, it is worth paying attention to them.
Computer Scientist Nick Szabo outlined smart contracts in his 1997 paper on the topic. In it he said, “smart contracts utilize protocols and user interfaces to facilitate all steps of the contracting process. This gives us new ways to formalize and secure digital relationships which are far more functional than their inanimate paper-based ancestors.”
On the second diagram with traditional IT solutions we use “workers” as self-performing programs. These programs can generate new actions in flows or generate new documents but the biggest problem is that these programs can be manipulated. Using smart contracts instead adds another layer of transparency and helps to eliminate manipulated data and reduce risk. Thanks to the underlying blockchain we can track each transaction and settle in real time. We can save information about commissions and use this immutable data to generate one common invoice instead of dozens of single documents.
The objective of this type of project based on private blockchain is to facilitate interactions, create value and cut time and cost for all its stakeholders in the network. Through harnessing distributed ledger as a Hyperledger Fabric technology we are bringing together all the parties into one, shared and connected network that enables unprecedented levels of value creation.
The network is open after prior arrangement for new stakeholders and provides a distributed finance platform for business transactions, which is run by every single user/company, and connected to all others. It’s a new type of solution which can’t be achieved before because we haven’t been sure that current and historical data are secure and immutable. Private blockchain helps firms create new IT solutions on higher level of business relationships that reduces time, cost, and builds trust between participants in their network.
Schedule a free 15-minute consultation on how a Hyperledger Fabric solution can improve your finance department.