In Invoice Financial Fraud, Blockchain Can’t Conquer Security Alone

4. April 2018.








India today is a leader in blockchain innovation and experimentation. With a strong community of innovators at home, foreign FinTechs’ entrance into the Indian market and local regulators embracing blockchain, the market is prime for adoption of one of the most cutting-edge technologies in the financial services space.

Brendan Taylor, CTO of blockchain company MonetaGo, says that’s because India has already proven itself as a country not afraid to embrace FinTech disruption – even with short-term negative consequences.

“Their government has always been unafraid to push new incentives and initiatives, regardless of some immediate near-term negative impacts,” he recently told PYMNTS in an interview.

Demonetization, of course, most immediately comes to mind as an example of this characteristic. The sudden initiative announced in late 2016 meant that 500- and 1000-rupee notes were no longer valid, an effort by Prime Minister Narendra Modi’s government to combat fraud and encourage growth of the digital economy. In its immediate wake, mobile wallet company Paytm reported a 200 percent increase in app downloads and a 1,000 percent increase in money deposited into its mWallet solution.

But demonetization also placed immense pressure on consumers and small businesses that had been dependent on cash.

“In the long-term, though, it has had a very positive effect overall,” Taylor said, citing a reduction in the “grey economy” and an increase in the government’s ability to capture taxes.

“India’s government hasn’t been afraid of using these initiatives because they are still developing,” he continued. “They’re not afraid to leapfrog technology generations, because they’re only just starting to build new markets. They don’t have the same drag from existing technology and legacy systems like they do in the U.S.”

Interestingly, India’s status as a developing nation (though the debate over that status continues) makes the country more easily able to embrace the latest tools, especially in the financial services sector. FIs in the U.S. and Europe, for instance, are often struggling with the process of upgrading systems that have been in place since the 1980s, Taylor explained, and outdated processes are deeply ingrained into the market, making them more difficult to change.

“India doesn’t have that problem, so they can go straight to the latest-and-greatest tech,” the CTO said.

This is a large motivation behind MonetaGo’s decision to focus on India for the launch of its latest solution, the executive noted. Earlier this month, the company revealed that its blockchain-powered network is now live in India, a solution developed in collaboration with several invoice financing companies in the country.

Trade finance is one of the most popular use cases for today’s blockchain developers, and other technology companies have targeted India for their own solutions in this field as well.

IBM, for example, announced in late 2016 that it was working with Mahindra Finance to develop a blockchain-powered trade finance solution to facilitate SMB financing. More recently, Infosys Finacle revealed plans for its own blockchain solution, created to help financial institutions in India deploy blockchain technology for the purpose of facilitating trade finance.

Even the nation’s own central bank, the Reserve Bank of India, released a report last year in favor of blockchain technology and advocating for the adoption of a cryptocurrency to digitize the rupee. Its paper highlighted trade finance, letters of credit and smart contracts as particularly promising use cases for blockchain in the country.

But MonetaGo’s technology was designed with a particular pain-point of invoice financing in mind: fraud.

“Somewhere between 1 and 2 percent of transactions in invoice financing involves fraud,” said Taylor. “One of the most common types of fraud in India involves duplicate financing.”

This occurs when a supplier submits the same invoice to multiple sources of financing (or slightly alters an invoice to make it appear as if it were a different bill in order to receive more funding on the same invoice). According to Taylor, this is a key hurdle for India’s trade finance space.

In the U.S., he explained, financiers have a central database through which they can identify whether invoices submitted for financing have a lien; India, however, lacks such a resource, making it easier for companies – particularly smaller firms – to commit duplicate invoice finance fraud.

“There is huge potential for duplicate financing to occur, whether by simple human error or whether it’s completely deliberate,” said Taylor. “MSMEs are much more likely to commit this type of fraud than larger companies.”

Paired with the typically less creditworthy profile of an MSME compared to larger corporates, the risk of duplicate invoice fraud makes factoring an unattractive product for financiers, and has created a gap in available invoice financing for companies in need of this capital.

Blockchain technology can combat this type of fraud, however, addressing many of the pain points of financiers in order to open up to market to small business borrowers, which Taylor said struggle from delayed and late invoice payments from their large corporate customers in India.

“What blockchain does is provide data integrity and transparency,” said Taylor. “It enables data integrity and integrity around business processes and transaction workflows. It guarantees that certain actions will happen, and that they will happen in the right manner. Anywhere you have a financial transaction with an exchange of contracts, whether a letter of credit or loan contract or any type of over-the-counter transaction, blockchain could potentially bring some real great opportunities.”

MonetaGo’s latest solution in India deploys this particular potential of blockchain in order to provide a single source of truth for invoice financiers to check whether invoices have been submitted for financing elsewhere, or whether data on an invoice has been manipulated to try to pass it off as a separate, different document. But Taylor noted that, despite its capabilities, blockchain is not the be-all and end-all solution to combat financial fraud like invoice finance fraud.

“Transparency is a great benefit of blockchain to eliminate fraud, but blockchain on its own is not the only solution,” the executive said.

Blockchain may be able to guarantee the integrity of data once information is already on a platform, but, Taylor explained, there is no way to tell whether the data that has been placed on a blockchain platform is accurate or whether it has been manipulated in the first place.

“When you start to incorporate machine learning on top of blockchain, you have a great combination,” he continued. “How do you identify when an invoice has been fraudulently manipulated? Blockchain won’t do that, but machine learning and artificial intelligence will.”

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