How Blockchain, AI, and IoT Are Reshaping Finance
Mundane and manual processes, like ledger entries and reconciliations, are being completely reengineered for a digital business world.
By Carolyn Tang Kmet |
The integration of emerging technologies with the finance function is driving rapid
evolution — and disruption — within the industry. Mundane and manual processes,
like ledger entries and reconciliations, are being completely reengineered for a digital
world, rendering the status quo obsolete. By now you’ve probably heard of
blockchain, a decentralized, digitally distributed ledger that enables completely verified
and secure transactions between multiple entities. As all parties in a transaction
validate activity, the transaction is written to the blockchain, creating an immutable
entry, and a single source of truth. Sounds promising, right? Now, if only we can get
past the fact that while blockchain technology was originally developed to facilitate
the exchange of bitcoin — enabling cryptocurrency holders to trace a bitcoin all the
way back to its origin — its application has so much more potential for the business
and finance world than all the fear, uncertainty, and doubt would lead us to believe.
Our New Building Blocks
“When some people hear blockchain, they think ‘shady, get-rich-quick
schemes’ and bitcoin. The reality is there are a ton of useful
applications for blockchain, like its ability to protect consumer and
client information from hacking and fraud, but change happens
slowly,” says Karrie Sullivan, CEO and principal of Chicago-based
Culminate Strategy group.
“At its very core, blockchain technology is a protocol — an agreed
upon medium of communication,” explains Phil Gomes, director of
communications for the Chicago Blockchain Center.
For example, blockchains can be developed for a limited number
of partners to manage in-network transactions and commerce. Rich
de Moll, a specialist executive and Finance Blockchain leader at
Deloitte Consulting LLP, refers to this application as “business
blockchain” and says it has the potential to reshape core finance
transaction processes to deliver cost and control benefits.
“Blockchains can be used to improve many finance processes,
including those related to procure-to-pay, order-to-cash, and
intercompany transactions,” de Moll explains. “Even more
interesting, though, is the impact blockchain can have on broader
business processes that intersect with finance, such as supply
Business blockchains integrated as a private network provide
permissioned partners with visibility into point-of-origination data.
All the blockchain partners are known, and their digital identities
are validated and recorded with each transaction. once these
transactions are recorded to the blockchain, they become
permanent, unalterable, and always accessible by all parties
involved. Such transparency has the potential to eliminate
downstream reconciliations, deliver a high degree of accuracy and
control, and enable straight-through processing.
“Blockchain can record financial transactions. It can record
documents, purchase orders, advance shipping notices, digital
goods receipts, proof of delivery, all sorts of events,” de Moll explains.
Blockchain’s recordkeeping function also can be extended to
automatically implement terms of multiparty agreements through
smart contracts. Smart contracts are not contracts in the legal sense,
they are functions executed by the blockchain that are dependent
on consensus protocols established by the contract’s code.
“Take a purchase order, for example,” de Moll says. “What happens
today is that I keep sending amendments, and I’m not sure whether
or not your order system is caught up with all the amendments. If
the amendments get recorded on the blockchain, then there is a
single source of agreement.”
How this works is the blockchain records the sequence of events,
along with related transaction elements such as the purchase order,
the invoice, and the goods receipt note. At the conclusion of the
transaction, the smart contract checks the data to verify that the
transaction adhered to all terms. once confirmed, the smart
contract can issue payment. The result is a method by which
involved parties can agree upon terms and trust that they will be
executed automatically with reduced risk of error or manipulation.
“Trading partners are able to confirm their agreement to the
transaction at the start, so the data is correct at origination,
eliminating the need for downstream reconciliations. Accounts
payable doesn’t have to touch anything and neither does accounts
receivable,” de Moll says.
Clients that automate purchase order terms and requirements via
smart contracts are seeing their costs drop from $4-$5 per invoice
to less than $2 per invoice, de Moll says. “Early adopters will be
able to significantly reduce the size of their accounts payable and
accounts receivable departments and be better able to optimize
cash flow and working capital,” he notes.
Regarding payments, blockchain brings to finance the ability to
facilitate near-immediate value transfers directly between partners,
eliminating the need for an intermediary along with any associated
costs or delays. This could revolutionize cross-border payments,
for instance, as money would not have to pass through multiple
banks and conversions.
However, Sullivan warns that applications that fundamentally
change financial transactions with the intent of eliminating the need
for banks will face major hurdles. “The change is bigger, the trust
factor is a hurdle, it would require regulatory change, and there will
be lots of resources dedicated to maintaining the status quo,”
All that said, the finance function is positioned to take the lead
on blockchain strategy and integration. “Over the next five
years, blockchain technology could upend how businesses and
marketplaces operate. Sooner or later, CFOs must come to grips
with that,” de Moll says.
Putting it in perspective, Gartner reports blockchain’s business
value-add will grow to $176 billion by 2025. Even now, few disagree
that blockchain has the potential to bring about significant cost and
operational efficiency. According to Gomes, blockchain technology
represents a once-in-a-generation shift in how we think about
network computing and commerce. “That by itself warrants some
level of examination,” he says. “Within a few years, we’ll start seeing
networks where both digital and physical goods have a blockchain
representation. That’s where the real excitement happens.”
Let’s Automate Everything
So, how does that work? Consider the growing Internet of Things
(IoT), where everyday objects are networked together to collect,
transmit, and respond to data. Maybe you already have an IoT
device, like a smart thermostat that lets you remotely control your
home’s temperature, or that automatically adjusts to optimize
your utility bills?
Now, what if instead of you or your home’s climate data managing
your thermostat, your bank account did? What if your bank account
could automatically dial-down your thermostat if your savings
threshold got too low? What if such an option already exists? It
does. Developed by London-based tech company ieDigital, the
Interact IoT platform enables banks and credit card companies to
connect consumer accounts to their smart devices. These devices
can then respond to changes in account balances.
Now take IoT technology, layer it on top of business blockchain,
and indeed, that’s where the real excitement happens.
“Let’s say we’re a tech company that manufactures PCs, and we
have purchase orders that specify that the PCs can’t be shaken because they’re highly sensitive. So, we put an IoT chip in the bundle. We’ll know if someone dropped the pallet. We’ll know if our
PCs have been shaken. We’ll know the chain of custody from point
to point,” de Moll explains.
And since the transaction is tied to the blockchain, the purchase
order could be tied to a smart contract, and payment could be tied
to whether the PCs were delivered on time, unshaken, and in
accordance with any other terms of the agreement — think
customs, import rules, financing, and more.
“With blockchain, you can connect all of that,” de Moll says.
Are You Minding the Machines?
Of course, IoT wouldn’t be what it is without another continuously
advancing technology: artificial intelligence (AI) — and its less
decisive sibling, robotic process automation (RPA). RPA can
automate repetitive processes by emulating human interaction and
tasks; AI is much broader, being able to make decisions or
predictions based not only on pre-established rules but also on
accumulated and interpreted data.
For example, consider the insurance industry, where fraud is rife.
Mads Hennelund, an advisor with Danish consultancy Nextwork
A/S, observes that the number of fraudulent claims seems to
increase as digitalization of interactions and reporting grows. Thus,
counter-fraud and detection become even more important.
“Consequently, AI is being deployed broadly in the industry to
increase companies’ abilities to detect suspicious patterns among
vast amounts of data,” Hennelund explains. As data scientists work
with the people handling reported claims, they’re essentially feeding
their machines new learnings that increase fraud detection abilities.
In similar fashion, KPMG has deployed IBM’s Watson in its audit
practice to analyze data for anomalies, and H&R Block has been
using it to assist its tax preparers to navigate and implement the
tax code. In all these instances, the AI learns processes, mistakes,
anomalies, functions, and more, thus enabling it to transform every
industry it touches.
Hennelund anticipates AI will ultimately handle the bulk of fraud
detection work, while humans will focus their efforts on doing more
in-depth investigations of the anomalies detected by AI as well as
exploring and implementing different fraud prevention mechanisms
Now imagine layering AI and RPA on top of blockchain. “When we
add analytics and artificial intelligence to blockchain’s end-to-end
transparency across the extended process and real-time data flow,
unusual transactions can be flagged and intercepted in real time,”
de Moll explains.
Such activity would ultimately disrupt the auditing process. Per
research issued by the McKinsey Global Institute, 42 percent of
finance activities could be fully automated by AI. These activities
include general accounting operations, cash disbursement,
and revenue management. an additional 19 percent of finance
activities, like financial controls and external reporting, could be
“The tools that fuel AI and RPA are getting better and easier to
implement every day,” Sullivan says. “When I do RPA projects with
clients, we analyze and organize tasks from the simplest, most
repetitive to the most complex. From there, we design our
automation and estimate the impact. What we’ve seen so far is
more of an unshackling of overworked and under-resourced
people, so they can focus on higher value work.”
That said, all these emerging and converging technologies are
changing the skill set and knowledge base demands of accounting
and finance professionals.
“I see AI augmenting finance staff by providing them with additional
tools and reducing a lot of the drudgery,” de Moll says, which means
accounting and finance professionals must embrace a technical and
process skill set to maximize the assistance AI will give them.
It also means companies must get started with these emerging
technologies. Start dreaming about what the future could look like.
Stop viewing emerging technologies as a hurdle and start looking
at them as a way for finance to take a strategic role in driving the
organization forward and changing the way business is done.