Betting on blockchain for freight payment
Eric Johnson, Senior Technology Editor | Feb 01, 2019 11:25AM EST

Caption:
For shippers, factoring is generally only a concern in terms of who their payment goes to — i.e., the factoring company instead of direct to the carrier. Photo credit: Shutterstock.com.

There’s hardly a single supply chain process to which blockchain technology hasn’t been theoretically attached in the past two years. But a decent rule of thumb in trying to determine where blockchain will get traction is to follow the money.

That means areas such as trade finance on the international side of logistics and freight payment on the domestic side are ripe to be impacted by blockchain-based solutions. And, in particular, a wrinkle in the trucking payment process called factoring might be particularly suited for blockchain, also known as distributed ledger technology.

Factoring is a type of financial transaction where a company sells its invoices to a third party to collect the payment due on its behalf. The third party charges a fee for the service — from as low as a fraction of 1 percent to the double digits percentage-wise — in exchange for paying the company holding the invoice more quickly.

The practice is widespread in trucking, particularly among small carriers and independent owner-operators that require quick payment for cash-flow purposes and also don’t have the revenue to support a back office accounts receivable and payable department.

“The invoice discounts probably fall into a range between 2 and 6 percent,” said Cecil Bryan, president of the Logistics Alliance Network, a consulting group that specializes in freight payment advisory. “The percent is based on how soon the carriers want to get paid. There are also supply chain finance and dynamic discounting programs that can offer better deals. They are driven by how much cash is involved.”

For shippers, factoring is generally only a concern in terms of who their payment goes to — i.e., the factoring company instead of direct to the carrier. But the pain shippers felt in 2018 as they wrestled with tight capacity showed that virtually any process that brings pain to truckers is potentially a crimp on capacity.

Pay truckers faster
In that environment, the Lincoln, Nebraska-based startup BasicBlock is envisioning a tweak to the factoring process that it believes will get truckers paid faster while sacrificing less of the value of the invoices they sell. Crucially, BasicBlock’s model is also designed to increase annual returns for investors (whether factoring companies or non-traditional buyers of invoices) and reduce the risk they face from buying an individual invoice.

The platform, which is still in its infancy, uses blockchain as a mechanism to do two things: execute smart contracts between factoring companies and drivers and authenticate the identity, location, and veracity of documents (most notably the proof of delivery). Smart contracts are a foundational component of blockchain solutions.

“While a standard contract outlines the terms of a relationship (usually one enforceable by law), a smart contract enforces a relationship with cryptographic code,” as the cryptocurrency and blockchain website Coindesk described smart contracts. “Put differently, smart contracts are programs that execute exactly as they are set up to by their creators.”

From the trucker perspective, BasicBlock uses a smartphone app to allow drivers to view, upload, and tag relevant documents. That mobile document scanning solution allows BasicBlock to geolocate the invoice and who is uploading it, with the identity of the person uploading verified by a multifactor authentication system.

That enables BasicBlock to tokenize the invoice and pay the trucker in fewer than five seconds, according to the company. Tokenization, in the context of blockchain, is creating a digital, tradeable replica of another entity. By turning the invoices into blockchain tokens, BasicBlock said it is able to automate the accounting and invoice processing functions a trucking company is required to undertake.

Taylor Monks, CEO of the company, said that translates into tangible dollar savings for carriers — as much as $100,000 annually in human resources costs, depending on the number of invoices that need to be processed. Those savings, he intimated, can foster better return for drivers and thus induce more drivers to the industry, since they’d theoretically be spending less per load on overhead.

The BasicBlock model is dependent on being a more profitable alternative for carriers than traditional factoring relationships. Monks said the invoice discount — the amount the carrier must forfeit to a factoring company to get paid more quickly — will be capped at 3 percent. But, in theory, the company could compete with any existing rate below that based on the idea that the factoring would be done using self-executing smart contracts.

However, the model is also dependent on luring factoring companies and non-traditional invoice consumers to the buy side of the equation. To accomplish this, BasicBlock is developing a crowd-sourced factoring system designed to minimize the risk associated with a single invoice, but it is also intended to compel invoice buyers to keep reinvesting in future invoices.

The theory goes like this: a traditional factoring company would buy thousands of dollars worth of invoices from a carrier, with the total amount — for example $50,000 — composed of full invoices to various shippers. The factoring company uses a risk calculation to weigh the chance of the individual shippers defaulting on those debts and then prices the cut of the invoice they’ll charge to the carrier accordingly. Other factors, such as volume of invoices and the value and potential for damage to the cargo, also weigh on that cost to the carrier.

The factoring company then fronts part of the discounted payment to the carriers, collects the payments from shippers, and pockets the difference. Depending on the terms of the arrangement, the factoring company pays a certain percentage to the carrier prior to collecting payment from the shipper and the remainder after.

But Monks sees this practice as not maximizing the full utility of the model while also exposing factoring companies to extra risk. He envisions companies wanting to buy freight invoices would essentially “invest” a certain amount with BasicBlock, which would split that investment among the invoices it is purchasing. That means the investment from the buyer isn’t tied to the full amount owed by a single shipper, minimizing the exposure if a single payer defaults.

BasicBlock also intends to keep reinvesting in invoices on a constant basis, giving investors annualized returns instead of an individual return from discrete investments. By cycling the money invested into new invoices, the company believes it can roughly double the annual returns traditional factoring generates and nearly halve the interest rates charged to carriers.

Factoring potential
Of course, it will have to compete in a highly competitive and fragmented market against established factoring names such as BAM Worldwide, TriumphPay, and Bibby Transportation Finance. It will also have to navigate a market that tends to be skeptical of upstarts and is still grappling with what blockchain is.

Todd Ehrlich, CEO of Atlanta-based BAM, which offers factoring within a broader array of financial technology products, said he and other providers already mitigate that risk across a section of shippers, a process he referred to as cross-collateralization. He also said some factoring companies, including his, already remarket invoices, especially for bigger customers where “our cost of capital isn’t cheap enough for them.”

In that scenario, BAM is essentially a pass-through and takes a cut for finding the business, although it’s not a big part of the business. Also noteworthy: Ehrlich said factoring companies allow small carriers to manage credit better than they might themselves, since responsible ones cap the percentage of invoices from any one shipper. Some small carriers expose themselves to providing too much credit to single shippers.

Ehrlich said the idea of blockchain is certainly interesting but that he’s not sure the exact fit is yet there in the market. Monks, though, used a households goods example of interconnected devices to explain the blockchain aspect of his company’s platform.

“Toasters will eventually be connected to the internet,” he said. “A smoke detector could also be connected. If the toaster starts burning, the connected smoke detector could turn it off, so you want one action to trigger another action using connected devices. Replace the toaster with a QR code and scanner at the dock, and the smoke alarm is a shipment of goods.”

BasicBlock is in the process of integrating with two prominent transportation management systems (TMS) providers, which the company couldn’t yet disclose. But that’s a natural progression for factoring companies.

TriumphPay forged partnerships in the second half of 2018 with TMS provider MercuryGate and freight payment and audit systems and services provider Intelligent Audit.

“We think we can get a 35 percent net return on the fund for the year,” Monks said. “Investors [invoice buyers] generally see 14 percent — that’s on a standard 3 percent of the invoice.”

He said the company’s focus is on making drivers’ lives easier and better but that he could eventually see shippers getting value through the approach by aligning all their contract or independent drivers on the platform.

The company has yet to take venture capital investment but said it is open to strategic investment.

“Blockchain is great on a whiteboard, but once we realized what was going on, and that there was this negative connotation for factoring, we realized there was a big opportunity,” he said.

Contact Eric Johnson at [email protected] and follow him on Twitter: @LogTechEric.