Chaining Intercompany Netting via Blockchain

Supporting inter-company transactions with Blockchain

Organizations are constantly changing and adapting to the ever evolving economic and technological paradigms. Today, they are moving from doing business locally and independently to globally and collaboratively, involving multiple businesses in their scope. As organizations evolve, the crux of businesses have become more dynamic, resulting in increasing transactions within businesses.

Increasing intercompany transactions have bought forth additional challenges of their own around Inter-company agreements, transfer pricing and transaction costs – also resulting in higher working capital requirements for organizations and increased efforts to reconcile the vast amount of information generated through these transactions via emails or verbal agreements.

What this means is an emerging requirement for a set up that supports these intercompany transactions, incorporating legal agreements within group companies; service agreements; and transfer pricing agreements amongst the various global businesses. It also means you need to set up teams across organizations just to manage the high volume of transactions and reconcile this information.

In addition to the costs incurred by these groups, they are also required to pay transaction charges to banks.

Technology has evolved over the years to support organizational requirements to manage emerging intercompany requirements. As economic conditions have changed, so have technologies: ERP systems have been brought in to support transactions, and innovative solutions improve effectiveness and efficiencies around transaction processes.

However, while organizations spent more and more money on improving processes, they have not been thinking sufficiently out of the box to consider alternative solutions.

Distributed Ledger Technology has introduced new possibilities for organizations. Now, it’s not just about efficiency and effectiveness, but organizations can completely eliminate processes like reconciliations, which require extensive manpower-based back office processing. For the first time there is an option for avoiding manual processes completely and embedding them in the blockchain based technology.

Blockchain has revolutionized the way we think about what is relevant for business, streamlining technology requirements and optimizing functional performances.

Blockchain solutions have all the ingredients like distributed ledger, smart contract, immutability and consensus, that can transform the intercompany requirements of global businesses.

By creating tokens pegged by local currencies or securities, the technology manages intercompany transactions at almost zero transactional costs.

Requirements for multiple standalone systems to integrate into the ERP system can be avoided completely. Reconciliations for all parties can be eliminated through the use of a distributed ledger. The benefits are plentiful: Driving improved working capital for organizations, FTE savings due to elimination of processes, high-speed transactions with minimal lag between systems, etc..

Think of the blockchain solution as a centralized platform that distributes tokens for products or services provided, instead of currencies through any intermediaries like banks. Organizations internally buy and sell products and services and receive tokens for every transaction. These transactions are logged and encrypted, ensuring security and divulging this information to only those who are relevant to the transaction. Over a period of time these tokens are settled through the banks, reducing the number of transactions and related costs. These transactions can be reviewed and audited historically and ensure that no changes are made. This is a key feature that enables organizations to govern and audit every transaction.

Visualizing a Blockchain-based solution

All group companies are on-boarded into a private Blockchain, and payments are made in organizational tokens/security. HQ/Central finance nets out at the end of the time period (differences between organizations) and converts to fiat currency, in required currency.

1. A security\token that will be internal to the organization is created

2. All the branches/geographies are hosted on Blockchain; the central finance creates tokens based on historical payments requirement by each branch; this is pegged against the currency of the HQ country or any other chosen fiat currency (information taken from open source oracles).

3. The token is distributed to each entity; these can make payments using the same to each other or to vendors (real time token equivalent of fiat currency can be seen).

4. At the end of the designated period, Central finance will net the tokens and convert to fiat currency, which will be processed through the bank for payment.

5. Multiple transactions are thus reduced to a single transaction for each entity with automatic reconciliation and audit trial.

Disclaimer: The views and opinions expressed in this article are personal and do not necessarily reflect the official policy or position of the author’s employer.