Jordan Graft, Executive Vice President of Payments at TBK Bank, explained the banking and factoring sector’s interest in blockchain-based smart contract technology to a large audience of transportation and logistics executives at the Blockchain in Transport Alliance’s (BiTA) spring symposium.
Most people who have just started learning about blockchain come to the subject through the notoriety of cryptocurrencies like bitcoin, which rose 1,200% last year and then crashed to less than half of its value. But blockchain applications far more interesting and technologically sophisticated than cryptocurrencies have already been developed, spurring a deeper, and potentially more productive wave of interest from industry.
Graft explained why cryptocurrencies were unlikely to be used as payments in transportation and logistics: the biggest reason is how the IRS treats cryptocurrencies for the purposes of taxes. “IRS tax treatment considers the transfer of a cryptocurrency an asset sale,” said Graft. “Now, accountants are normally not violent people, but if you tell them that you’re generating thousands and thousands of asset sales, you’ll see them get violent,” joked Graft. Other barriers to the use of cryptocurrencies as payments include privacy and the volatility in price.
Smart contracts are run on a more advanced blockchain platform than bitcoin, because rather than simply executing peer to peer transactions, the blocks use a Turing-complete language, which is a fancy way of saying that a user can in theory program them to do anything a computer can do. Smart contract technology allows developers to build decentralized applications—software that runs on a decentralized network of computers (think of cloud computing, but instead of being controlled by one company like Amazon, it’s on a peer-to-peer network of nodes). The most famous example is the Ethereum network, where nodes that run decentralized applications (“dapps”) are rewarded with the cryptocurrency Ether.
Because smart contracts are so much more flexible and robust than simple cryptocurrencies, they can answer more potential use cases, especially in the transportation and logistics industries. Graft’s talk, “Smart contracts in finance and blockchain,” took a look at some of the most promising of these areas.
Graft started off by talking about what blockchain is and isn’t, or what it can and can’t do. No, blockchain will not solve the world’s problems, and it probably won’t even enable instant payments from shippers to brokers or carriers. Graft pointed out that ‘net zero’ payment cycles require a much more intensive use of capital than longer payment cycles, and the simple addition of smart contracts won’t generate the hundreds of billions of dollars needed to capitalize net zero cycles out of thin air.
In Graft’s example, a publicly traded 3PL with a net thirty payment cycle could have a 19.7% return on invested capital, where a net zero cycle would only yield 8%, making the logistics company much less attractive to shareholders and potential investors.
According to Graft, the main ways that blockchain and smart contracts will impact the financing of transportation companies and receivables factoring is by finding back office efficiencies, streamlining processes, increasing systems integration, and allowing banks to lower their rates even further. Graft pointed out that receivables financing is an expensive product: both for the customers (a 2% fee on a thirty day billing cycle equates to a 24% APR, equivalent to a personal credit card) and the banks (because factoring transportation receivables is very time-consuming and labor-intensive compared to servicing other kinds of debt, like a home mortgage).
“Blockchain will not change the underlying working capital requirements of the industry,” said Graft. “Factoring is an expensive credit product to operate, but increased systems integration will reduce the cost of factoring and drive down rates, and will likely attract larger financial institutions and banks to the market.”
Technology has already driven factoring rates down from about 5% to around 2%, and Graft says that blockchain, and especially the systems integration from common data standards, has the potential to move that number even lower. “Instead of 3 guys in a garage charging 5 percent, you’ll see rates come down in a dramatic way,” said Graft.
Graft demonstrated Triumph’s blockchain prototype by taking the audience through an entire workflow from invoice presentment; approval and payment on a shared ledger; rate confirmation; load pickup; load tracking; load delivery; invoice presentment; adjustments; invoice approval; assignment; and payment. Graft stressed that “the mobile app we’ve built is nothing special; it’s generic… this interface isn’t what’s important. What’s important is the systems integration: if we get the standards right, we can build interfaces that work with multiple systems at once [EDI and API].”
John Shields, the CTO of Triumph Business Capital, said that blockchain represented a potential step change and value proposition over traditional integrations.
One respondent from the audience pointed out that in the highly fragmented trucking industry, technological adoption is slow and uneven, and blockchain by its very nature depends on a kind of network effect to gain momentum (i.e., as more people adopt the technology, it works better and offers better returns on investment). Graft agreed that it was an issue for the industry, but reminded the audience that small carriers and owner-operators who don’t have the computing hardware, software licenses, or data professionals to invest heavily in technology already use large 3PLs like Echo and XPO as proxies to outsource their technology needs.
“Larger tech-enabled 3PLs are gonna look more like technology companies,” said Graft, “and this is going to continue that trend.”
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