Imagine a world with no out-of-sync ledgers. No need for reconciliations. No fragmented or hidden data that create multiple versions of the truth.
In this world, you would have just one version of a ledger, with simultaneous settlements that are seen by all parties. You could get instant visibility on the status of accounts receivable, supply chain movements, and other transactions. You would have a transparent, chronological history of events for a single source of truth.
This world is coming, and its name is blockchain. As a revolutionary technology for recordkeeping, it is poised to change the future of finance—in accounting, asset registers, payments, trading, collateral management, and more.
How should you prepare for this wave of disruption? What are the implications for your finance organization? Inside, we explore the principles of blockchain through a finance lens, including a framework for projecting the impact on core processes and our hypotheses for a blockchain world.
Traditional financial systems operate with a centralized database, usually with a single point of authority. Blockchain technology, on the other hand, allows for a distributed database that holds a growing number of records. Instead of existing in one place, the ledger is continually updated and synchronized across multiple computers in a network. Therefore, any participant in the network with the proper authorization can view the entire ledger—without relying on an intermediary or any one authority.
As each transaction occurs, it is stored chronologically in a block, and each block is connected to the one before and after it. To ensure data integrity and security, all parties in the network must validate each transaction—using agreed mathematical formulas called consensus mechanisms— and each block is secured by cryptography.
As such, the blocks form a permanent, chronological chain of transactions that cannot be changed without the approval of other participants. It is as if a notary is present at every transaction, and the blockchain leaves a public audit trail of all activities, accessible to those with the proper permissions. As a result, all authorized parties in the network have access to a single, shared source of truth, which may foster trust across multiple sites or geographies.
Another key feature of blockchain technology is a "smart contract," which is a self-executing protocol that enforces a previously agreed arrangement. For example, a smart contract could trigger an automatic refund under certain conditions or the automatic payment of an agreed commission after a sale. These smart contracts can eliminate delays in traditional finance processes, while increasing transparency and reducing reliance on middlemen to follow through on their commitments. Moreover, like other parts of a blockchain, smart contracts are immutable, so they can enhance accuracy in the financial statements.
|VC investment in blockchain achieved a record high of $512 million in 2017, up from $15 million in 2013.1|
|By 2021, at least 25% of the Global 2000 will useblockchain as a foundation for digital trust at scale.2|
|The business value added by blockchain will surpass $176 billion by 2025 and $3.1 trillion by 2030.3|
1. KPMG International (data provided by PitchBook), The Pulse of Fintech Q4 2017:
GlobalAnalysis of Investment in Fintech (February 2018).
2. International Data Corporation (IDC), FutureScape: Worldwide IT Industry 2018
3. Gartner, Inc., Practical Blockchain: A Gartner Trend Insight Report (March 2017).
How it works: blockchain basics
These principles of blockchain technology hold great promise for finance organizations, including quantitative and qualitative benefits. Among them:
|Up to 95% reduction in errors, due to the elimination of out‑of-sync ledgers andreconciliations|
|Up to 40% increase in efficiency, due to straight-through processing and a singlesource of truth|
|Up to 25% improvement in customer experience, due to faster processing and use of digitalchannels|
|Up to 75% reduction in capital consumption, due to quicker settlement of trades, straightthroughprocessing, and freed-up capital flows|
* Based on KPMG LLP (KPMG) research
How will these kinds of benefits manifest in core finance processes? To project the impact and determine which processes are best suited for blockchain, KPMG developed a framework that evaluates each core process on four key factors:
These four criteria can be applied to all core processes, helping finance organizations contemplate the impact of blockchain on their service delivery.
Blockchain’s projected impact on core finance processes
For example, consider the quote-to-cash process. With activities like credit history analysis, product/service management, and accounts receivable, the process is highly standardized and rule-based—without a lot of judgment or individual discretion. And while most companies are working to centralize their data, many still have it housed in several enterprise resource planning (ERP) systems.
Accordingly, manual effort is often required to update data from one system to the next or correct associated errors, such as inaccurate information on invoices, which can slow down the receivables process. Finally, quote-to-cash clearly involves numerous stakeholders—from customer qualification through to collections—and there is often a lack of transparency between entities.
Based on these process characteristics, blockchain technology may bring significant improvements throughout quote-to-cash:
While quote-to-cash is a great candidate for blockchain, with a potential for high impact, other core processes are less well suited, as everything in finance is not necessarily made better by blockchain. Some processes will be better served by conventional databases and a digital overhaul.
Impact analysis: Quote-to-cash
Blockchain clearly will have significant impacts on the finance function, and most organizations will gradually adopt the technology as they envision a new operating model for finance. We anticipate the following key trends:
From a new level of data transparency to extreme efficiency gains, blockchain opens finance organizations to a world of new possibilities. But it also opens them to new questions, such as:
The answers to these kinds of questions will pave the way to the blockchain world, helping CFOs embrace a new future for finance.
A global custodian bank wanted to understandhow its transaction banking unit could leapfrogcompetitors by providing a real-time, transparent,and seamless global payment experience to clientswithout making a large investment in a new globalpayment system.
The custodian engaged KPMG to help developa case for change to efficiently and effectivelyachieve this goal. Working with both the client and apayment protocol and exchange network developer, KPMG developed a distributed ledger overviewdocument highlighting benefits, capabilities,and use cases to share with key stakeholders.This featured a conceptual design of a distributedledger cross-border, cross-currency payment systemfocused on optimizing clients' global remittancecapabilities. Opportunities to increase efficiency andrationalization in the custodian's global operationsunit were also identified.
Once equipped with the conceptual design andpertinent information, the custodian was able tofurther its blockchain and global payment strategy.
How KPMG can help
KPMG’s Financial Management practice along with our Digital Ledger Services team can help your organization seize the potential of blockchain. Our suite of services provides full support at every stage of development—from proof of concept to designing relevant use cases, integrating systems and operations, through to ongoing management support.
Embracing a rapidly-advancing new technology that disrupts business as usual is not always easy. KPMG will help keep you educated on the growing blockchain ecosystem, informed of new blockchain developments, and aware of the evolving regulatory landscape. Our tailored approach incorporates strategy, security, cost, privacy, performance, risk management, and more.
KPMG LLP, the audit, tax, and advisory firm, is the U.S. member firm of KPMG International Cooperative (“KPMG International”). KPMG is a global network of professional services firms providing audit, tax, and advisory services. We operate in 154 countries and territories and have 200,000 people working in member firms around the world.
To learn more about KPMG’s digital ledger services,
|John E. Mulhall
Financial Management Service Network Lead KPMG LLP
Managing Director, Advisory Financial Management KPMG LLP
Partner, Advisory Management Consulting KPMG India
Some or all of the services described herein may not be permissible for KPMG audit clients
and their affiliates or related entities.
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.