How Blockchain, AI, and IoT Are Reshaping Finance

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 re engineered 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 chain management.”

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,” Sullivan says.

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 and incentives.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 mostly automated.

“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.