By Russ Banham
CFO
Someday, you may use an app at a supermarket to scan the beef sirloin you plan to buy for dinner, discovering the cow’s life journey. Another app will assure that the pair of handmade Gucci loafers you just bought are authentic. These apps will be connected over the internet to blockchain platforms, each one a digital ecosystem created for a specific industry. And they’re not distant dreams of tech entrepreneurs — these apps are already in development.
A year ago, the CFO/Duke University Business Outlook Survey found that 78% of U.S. finance chiefs said they didn’t know whether or how blockchain would affect their company. Only 3% claimed to even understand it. But many organizations apparently did their homework since then and warmed to the technology’s potential. In Deloitte’s 2019 Global Blockchain Survey (of a more general set of senior executives), more than half (53%) said blockchain had become a critical priority for their organizations; four in 10 said they were willing to invest $5 million or more in blockchain initiatives in the next year.
What has been the catalyst? Companies eager to drive down operating costs, certainly. The other, somewhat surprising, impetus is the lack of trust — between industry competitors, suppliers and customers, and even the manufacturer and the consumer.
Traceable and Accurate
Farther back, five years ago, blockchain meant bitcoin, the cryptocurrency whose founding depended on a trading platform in which currency data was confirmable and immutable. Bitcoin’s star has faded. But blockchain has wider value as a network to exchange data and transact via “smart contracts.” These contracts trigger based on prearranged terms and conditions. Smart contracts can automate highly manual and semi-manual transactional processes to cut operating expenses and reduce points of friction with customers.
At its most basic, blockchain is a digital ledger that records transactions among a network’s participants and distributes them to members in real time. Every 10 minutes, a transaction is verified as factual and then permanently time-stamped and stored in a “block” similar to a page in a ledger. Once a block of transactions is complete, it is linked to the preceding block to create a chain of records.
Since the data entries provide a secure audit trail, network members are assured the ledgers are beyond reproach (although some, like MIT Technology Review, claim blockchains are hackable). “Blockchain’s initial wave of business transformation is the creation of single sources of truth,” says Jamie Solomon, a managing director for North America at Accenture.
The technology lets distrustful parties come to an agreement without relying on intermediaries. In blockchain-fueled networks, companies can share accurate and verifiable data with each other and with suppliers. Not all data — just information that is of mutual benefit. “Industries have now passed the stage where they want to apply blockchain because it’s cool,” says Paul Brody, global blockchain leader at Ernst & Young. “There is now widespread [recognition] that blockchain lends itself to solving real business problems.”
Taking Steps
One of those problems is overcoming consumer skepticism of companies that claim to sell “ethical” goods. Blockchain, it turns out, offers an uncontestable way to trace a product’s lifecycle. That capability impelled Lukas Pünder, finance chief of handmade shoe brand CANO, to investigate developing a blockchain for the fashion apparel industry.
“We wanted consumers to be able to trace every step in the manufacture of each pair of our shoes — from the origin of the raw materials to the craftspeople in Mexico who use traditional braiding methods,” says Pünder.
Pünder leveraged Oracle’s blockchain technology to create a digital ecosystem for CANO. Customers interested in their purchase’s provenance can use an app on their smartphones to scan a near-field communications chip embedded in the shoes or apparel. The two-year-old company’s complete summer collection will be equipped with the transparency technology.
For the winter collection, to be launched in September, CANO products will use a pilot solution for the entire industry called Retraced. Retraced offers more in-depth information about a product and has a more sophisticated design. Other fashion brands that will be equipped for the Retraced transparency solution include European makers John W. Shoes, Afew Store, and Jyoti-Fair Works. Additional brands will be onboarded after a test phase. With Retraced, about 50,000 to 100,000 products will be tracked this year.
Trust in a company’s sustainable practices are important, Pünder says. In an industry rocked by allegations of unsafe working conditions and low wages, the apps let consumers know that they’re not purchasing products from unscrupulous sellers. “By leveraging transparency as a core value, a company can achieve desirable brand differentiation,” Pünder says.
Companies like CANO can also discern which suppliers are producing shoddy work, generating lower quality products that customers tend to return. “Ten percent of all fashion items are faulty. Now you can identify exactly which company in the supply chain is responsible,” Pünder says.
Pruning Processes
In what other industry is trust an issue? Insurance. “Policies and claims involve multiple parties, complicated agreements, complex logic, different intermediaries, and many verification points, making them ripe for blockchain,” says EY’s Brody.
More than 30 large global insurers, reinsurers, and insurance brokers joined in 2018 to create a blockchain consortium, The Institutes RiskStream Collaborative.
“There’s great value in members sharing their data for mutual benefit, but the problem in the past has been an immense lack of trust between these entities,” says Christopher McDaniel, Risk Stream president.
The consortium is developing Canopy, a blockchain that connects the industry in a data-sharing network. An example of its proposed use is the car insurance claims process. At present, if two drivers, each insured by a different company, are in a minor collision, they jot down their driver’s license and car registration information. Each policyholder then calls his or her insurance agent to relay the other party’s information.
Once notified, the insurers start the drawn-out claims administration process, manually preparing a “First Notice of Loss.” A claims adjuster is tasked with gauging the extent of the damage and relative fault for the accident. This process entails numerous and lengthy back-and-forth phone calls and emails between the insurers. They eventually agree on who pays.
In the future, with Canopy, each policyholder would have an app provided by their insurer. The drivers would upload a QR code reader and scan each other’s codes. The information would flow to Canopy in real time, giving the insurers the ability to simultaneously verify the drivers’ identifying information. The blockhain platform would trigger a First Notice of Loss without the involvement of agents.
By sharing their policyholder data in Canopy, the two insurers’ processing cycle times would shorten. Agents would be able to devote more time to managing client risks instead of processing information. “You need people to process claims and underwrite policies,” says Matt Lehman, managing director in the insurance practice of Accenture, a solutions provider to RiskStream. “That’s a lot of trapped value.”
Both the proof of insurance and First Notice of Loss capabilities will be technically ready and available to network members in July, but then carriers have to embed them into their own mobile applications, which will take longer.
Further down the line in Canopy’s development, as the vehicle accident information flows to the blockchain platform, it could set off a series of smart contracts to member tow truck firms, car repair shops, rental car agencies, and law enforcement.The next stage in Canopy’s development calls for members to share data in the interest of developing new products. RiskStream’s McDaniel provides the example of a group of electric bicycles reinsured at a micro-transactional level.
“A primary insurer of electric bicycles could cluster them across different geographies, creating a portfolio of risks that would be traded in an open market,” he says. “Different reinsurers would assume portions of the primary insurer’s risks in real time, automated through prearranged smart contracts.”
“Once you remove the inefficiencies across companies in an industry, all sorts of innovative concepts bubble up, to the benefit of all parties in the blockchain network,” McDaniel adds.
Sean Ringsted, chief digital officer at the large global insurer Chubb (a member of Canopy), cites the value of Canopy’s ongoing work for policyholders. “By improving our operating efficiencies, eliminating duplicative, redundant data flows and questions about where the data comes from and is it accurate, our customers benefit from much easier and less time-consuming claims processes, not to mention more innovative risk-transfer products,” he says.
Farm to Table
Livestock agriculture is another industry experimenting with blockchain. “There’s a growing segment of direct-to-consumer brands that retail only organic, free-range, grass-fed, responsibly raised, and naturally sustainable lamb, beef, chicken, and pork of the highest quality from small farmers,” says Leslie Moore, owner of Farmer Girl Meats, an e-commerce farm-to-table business based in Princeton, Kansas. “The challenge has been proving everything I just said to consumers.”
Moore, a third-generation farmer raised on her family’s grass-fed beef farm in Kansas, left in the 1990s for business school and later a job in branding at a large manufacturer. She returned to the farm with an idea for building a platform that would track relevant data on the farm’s meat products.
Truth and transparency are lacking in today’s meat industry, she says. “Ambiguous language in [U.S. Department of Agriculture] regulations allow imported beef from Paraguay, New Zealand, and Australia to be labeled as ‘Product of the USA,’” says Moore.
The imported grass-fed beef is shipped in what are called primal cuts (the main areas of the animal, which include the loin, rib, round, flank, chuck, sirloin, and brisket). It goes directly to USDA-approved facilities in the United States. The meat is inspected and cut into packaged goods destined for grocery store shelves nationwide.
“An animal born, raised, and harvested in a foreign country can be marketed to consumers as a product of the United States; its true origin is unknown to the buyer,” Moore claims.
Through a partnership with Silicon Valley blockchain startup Citizens Reserve, Moore hopes to alter the paradigm for small livestock producers. The app provides traceability from the birth of an animal to the steak or pork chop on a plate, she says. “Everything that animal encounters over its lifespan becomes part of its story.”
This includes what a cow or pig is fed each day, what kinds of fertilizers or pesticides the farm may use, and whether an animal has been treated with antibiotics, making it no longer antibiotic-free. “That classification results in a lower markup, but if the buyer could see that the medicine was used only topically and not ingested, it could alter economic outcomes for the farmer,” says Moore.
The blockchain platform would give each package of meat a unique digital identity providing “farm-to-plate” lifecycle information so consumers can make more educated buying decisions.
Thane Tokerud, financial controller of Citizens Reserve, says the major benefit of the ecosystem it is developing, called Impact Ranching, is providing traceability.
Farmers and other vendors on the platform could view distribution outlets eager to sell meats from farms that can literally prove their sustainable practices through the use of blockchain, Tokerud explains. Specialty meats have up to a 20% markup, so the additional distribution opportunities can equate to significantly higher margins.
Another advantage, which may not get the promotion the others do, is in product recalls. Regulators and distributors could quickly ascertain the origin of meat sitting on grocery store shelves and pull it if necessary. Walmart and its Sam’s Club division, for example, are planning to implement blockchain technology this year to get real-time, end-to-end traceability of leafy green products.
Impact Ranching, which goes live in 2020 and will have many agricultural industry collaborators, also may obviate farmers’ reliance on the costly third-party certifications required by the USDA. “Since the data in the ecosystem is verifiable and immutable, the information theoretically would allow farmers to self-regulate, reducing the time-consuming bureaucracy they presently confront,” Tokerud says.
Accenture’s Lehman sees a similar benefit for insurers. “Regulation in insurance is complicated, given 50 different states with disparate rules and complex filings,” he says. “If you can create specific real-time views for regulators in Canopy, where they get to see accurate, immutable, and standardized data they know is factual, it will remove a layer of bureaucracy.”
That’s a big ask of regulators — blockchain technology will first have to earn the government’s imprimatur. That may take awhile because the applications are still somewhere immature. It’s also unclear how fast or if these industry solutions will produce a return on investment for companies. But industries are pushing forward, confident of blockchain’s potential to bring business partners together and build credibility with consumers.
Russ Banham is a Pulitzer-nominated financial journalist and best-selling author.