A blockchain for invoice financing that has gone into production in India may demonstrate how distributed ledger technology can be used to track digital assets and deter fraud.
Three Indian factoring exchanges — RXIL, A.TReDS, and MYND Solutions — and technology company MonetaGo announced the blockchain network on Tuesday. The exchanges are marketplaces to which small businesses bring invoices to obtain financing from large Indian banks and several foreign banks. The exchanges sought a way to reduce fraud.
Between 1% and 2% of invoice financing globally is subject to fraud, according to Jesse Chenard, MonetaGo's chief executive. This amounts to around $50 billion in fraud per year, he said.
Often this takes the form of double financing of the invoice: a supplier who is owed money from a buyer takes that same invoice to multiple venues.
“Because today they don’t have a way to communicate with each other, that’s one way it’s perpetrated,” Chenard said.
In the U.S. there is a lien registry, so fraud is more complex and involves the use of fake company profiles and backgrounds, with the goal of hitting multiple factors at once. (There is a parallel here to online lending, where fraudsters will hit several online lenders at once with applications infused with fake identity information in the hopes that a few will be approved.)
The new blockchain is based on Hyperledger Fabric. MonetaGo provides the application programming interfaces, the application, the logic and the hashing of the invoices.
To prevent someone from slightly altering an invoice and then resubmitting it as a different invoice, the software analyzes combinations of hashes of various fields on the invoice, so it can identify subtle differences between files. If two invoices look very similar, the exchanges get a notification that they are attempting to factor an invoice that might have already been financed somewhere else. It is then up to the exchanges to do due diligence to determine if the invoice is fraudulent or legitimate.
“There are cases where a small change in invoice is completely legitimate, so we can’t just block everything from that perspective,” said Brendan Taylor, MonetaGo's chief technology officer. “It is up to them to do more digging on it.”
In addition to fraud detection, the blockchain technology provides something else these invoice exchanges need: privacy.
“They wanted to be able to be able to identify invoices in a way that didn’t give away details or insights into who the customers are, since they’re all competitive with each other,” Chenard said. The ledger allows only certain relevant details to be shared.
MonetaGo is also working on other blockchain use cases in other markets.