Should small and medium-sized enterprises adopt blockchain?

Neeta Gupta
Nov 19, 2019 · 5 min read

Blockchain as a technology has been garnering interest over the past couple of years. Millions of dollars have been spent on research to zero-in high-level of use cases, as well as to determine whether or not the technology is suitable for various real-world scenarios.

When it comes to adopting blockchain, many times, businesses find themselves at crossroads as there is lack of a clear roadmap. This leads to significant doubts about whether blockchain is apt for companies which have an intention to use it.

There are live examples of blockchain being implemented in multinational companies like Walmart, MasterCard, IBM as they have both financial and technical support to develop and implement the technology. However, when it comes to SMEs (Small and Medium Enterprises), they often tend to suffer from resource constraints, especially when it comes to technology adoption.

SMEs and their current challenges

We all are aware that SMEs are the backbone of every economy. In Europe alone, there are around 21 million companies who fall under the SME sector. These 21 million companies are offering a source of income to about 90 million people in the continent. The figures don’t alter much in the US, and the 30 million SMEs there are responsible for offering employment to 2/3rd of the private sector jobs. In spite of their status as the backbone of any economy, they face many challenges. SMEs find it difficult to:

  • find investors/finance;
  • scale their operations;
  • process payments;
  • hire additional services.

Since the economic crisis of the year 2008, banks have become averse to taking risks. As a result, they are not very keen on lending money to SMEs. This is one of the main reasons that many new or established SMEs shut down within the first three years of being in business. Figures depict that 30% of small and medium enterprises stop doing business because of a lack of funding.

The International Finance Corporation (IFC) has estimated that 65 million enterprises or 40% micro and SMEs in developing countries are not financed for an amount of $5.2 trillion (approx.) every year. East Asia and Pacific region has the largest share of 46% of the total global finance gap, followed by Latin America and the Caribbean with 23% share and then Europe and Central Asia with 15% share.

How can blockchain help SMEs?

1) Reduce Costs

Small and Medium-sized enterprises often suffer from resource constraints. When compared with large firms, SMEs lack the capability of reversing wastage of resources. Moreover, to overcome the issue of resource constraint, SMEs need to lower down their operational costs as they are competing with the big players of the market.

One of the ways that blockchain helps SMEs is by removing the need for intermediaries in the chain of business, especially in terms of value transaction. These intermediaries might be banks, lawyers, brokers or middleman, who are needed to secure the transaction between SMEs and their trading counterparts. By using blockchain technology, SMEs can lower down the transaction costs and can easily compete with larger firms. There might be instances when the intermediaries cannot be avoided, and the SMEs need a trusted party to regulate the interaction with their business partners.

Therefore, the decision-makers in these organizations need to evaluate the cost incurred to the business in case of keeping intermediaries or while implementing blockchain technology. The need for intermediary may vary; however, the knowledge transfers and knowledge utilization of the blockchain technology may turn out to be beneficial in the longer run.

2) Scalability

For all those Fintechs startups falling under the SME category, it is essential to offer high speed in terms of transactions. When we talk about public blockchains like bitcoin and ethereum, they have a limitation when it comes to scalability. The bitcoin blockchain is capable of making seven transactions per second, whereas the ethereum offers the possibility to do 15 transactions per second. However, when you draw a comparison with Visa or Mastercard, these payment giants claim to accomplish 2000–5000 transactions per second.

The vast difference in these figures can make anyone second guess their decision of adopting blockchain technology. Probably, scalability is one of the reasons why private blockchain came into being. Ripple has recently claimed that its blockchain network now can handle 1500 transactions per second. As we can see, there is a vast gap still from the likes of Visa and Mastercard, yet this seems to be a considerable improvement.

Besides the transaction volume, latency is another thing to consider on the blockchain network when talking about quick value transaction. Therefore, SME’s who are looking for fast confirmation of their transaction may opt for private or consortium blockchains like Corda, Quorum. If confirmation of payment is not that priority, then they can easily choose for public blockchains.

3) Counterfeit Products

With globalization, the world has become one extended market place. The competition has gone stiff, and some businesses take the unethical route at times to maximize profits. As a result, it becomes necessary to trace the supply chain line.

Blockchain, as a distributed ledger technology offers the perfect solution to determine counterfeit products. The SMEs who are complying with the World Fair Trade Organization policies can easily trace the provenance to the products, they are buying or selling through the blockchain ledger. It will also help the SMEs to establish trust with the customers and gain an edge over the competition.

4) Digital Representation of Assets

The blockchain ledger consists of digital codes. A unique hash code is assigned to each digital asset in the blockchain. This enables SMEs as well as their counterparts to trace products by using the hash codes. E.g., blockchain can help the SMEs to track food delivery supply chain efficiently. As the quantity of the food supplied from the farmers to the end customer is quantifiable it can be easily traced via blockchain. So, if the SMEs wish to trace a certain asset which can be represented digitally easily, then blockchain is their thing.

5) Immutable Ledger

As as a decentralized ledger technology records information/data in an immutable manner. The system is not open to accommodate human error. Therefore, when a transaction is made between peers, it is validated by nodes present in the network. The peers must ascertain the accuracy of the data when they verify a transaction. It can help SMEs to avoid any business forgery or fraud.

Final Thoughts

In the last couple of years, blockchain as a technology has gained a lot of momentum. This DLT technology is capable to offer a solution to so many problems faced by the small and medium-sized enterprises. The technology can help SMEs in sectors including agriculture, insurance, health and medication, technology and utilities. The technology offers advantages like cost-efficiency, transparency as well as growth possibilities for the SMEs. However, it is strongly recommended that the small companies who wish to adopt the blockchain technology to be mindful and evaluate the pros and cons thoroughly.

Neeta Gupta

Written by

A technology enthusiasts who loves to explore

Akeo

Akeo

Official Medium publication for Akeo.Tech focusing on innovation and spreading awareness about technologies that can disrupt current business models. Follow us to get deep insights into blockchain, AI & ML, Fintech, and Industry 4.0. More info at — www.akeo.tech

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