Disrupting Credit Scores With Blockchain

We have all heard about Nike. It’s the iconic brand associated with such athletes as Michael Jordan and Tiger Woods. It is a true symbol of American industry and consumerism. What fewer people know is that Nike started off as an importer of Japanese shoes, before it ever made an American shoe. According to Nike founder Phil Knight, in his book ‘Shoe Dog’, the company also had cash flow issues when it was a small business, just starting out. It went through several banks in its early years, as few banks wanted to keep its business. The main issue which lead banks to drop Nike was that Knight requested small business loans, which banks did not want to give him. His business strategy was growth at all costs, this meant that he used each loan to purchase as much inventory as possible. The net result of this strategy was that he was requesting credit when he had little to no cash in the bank. While this was an effective growth strategy, it made Nike struggle to receive lines of credit each time it wanted to acquire further inventory.

joshua-rodriguez@unsplash.comGetting Credit is Not Easy

It turns out that difficulty obtaining credit is a common issue for small and medium sized businesses. It is also a huge, dysfunctional market. Estimates put the size of this market, known as the factoring market, between 2.4$ — 3$ trillion globally; it is also growing at ~10% annually. The dysfunction lies in how banks and other financial institutions approve credit for SMBs, and the interest rates which creditors charge. Creditors take on the risk that the SMB may be unable to return their loan. To cover the risk which lenders assume, they charge SMBs very high interest rates. It is also commonplace to see a scenario like Nike’s, where any available cash goes to inventory. Banks, when assessing whether to lend to a SMB, analyze the current cash flow of the business. If the business has a lot of cash on hand, then credit is easier to obtain. Yet this is rarely the case with small businesses, as they often use their cash to invest in the business.

Businesses need credit or cash and financial institutions have the money they need. In a sense, the financial institution is the middle man between SMBs and their cash. To increase efficiency in the factoring market, removing the middle man might make sense. From ride hail to hospitality, technology has shown it is an ideal tool for removing the middleman. Technology products, such as Bluevine and Fundbox, indeed exist to provide loans for small businesses. Regardless of technology, these platforms must still assume a fair amount of risk when lending to SMBs. Therefore, the interest which they charge is still higher than what most SMBs would like to pay, somewhere between 10 — 50 %. In a word, what is missing in this relationship is trust. If the credit providers could trust that they would be paid back in full by the SMBs, they would be able to charge less interest.

billy-pasco@unsplash.comBlockchain Makes Getting Credit Easier

Enter blockchain. Leveraging this technology, a different kind of factoring platform was built, called INVIOU. This platform allows creditors to provide businesses with credit, and for businesses to seek and obtain credit from creditors. The platform leverages blockchain to enable SMBs to share their credit worthiness. This reduces risk for lenders, while maximising profit for them at the same time. Creditors can predict with greater accuracy whether they will be paid back. In this way, INVIOU aims to bring factoring interest rates into single digits. It aims to do this by creating a blockchain protocol for small businesses to log and verify their financial documents. This gives them a trusted and fraud-free credit reputation. SMBs can use this credit reputation to show that they are more likely to return funds, and secure more favorable interest rates.

The platform enables businesses to upload digital invoices to the network and encrypts them. Invoices are tokenized so that they can be transferred between parties. Encryption and decryption of the financial record data takes place exclusively on the users’ machine. This means that INVIOU servers do not need to hold private keys. To solve the challenge of sharing confidential data among users of the platform, the platform uses advanced Proxy Re-Encryption. This allows secure delegation of decryption rights, which enables confidential data to be shared between participants in public networks. INVIOU’s system also addresses lenders’ fear of fraud and forgery. For example, invoices cannot be forged or duplicated. The platform uses IPFS hashes to represent a file while only storing its hash in the Ethereum blockchain. This guarantees authenticity for the IPFS file. Any change to the IPFS file creates a modified hash which will no longer match the one stored in the blockchain.

adrian@unsplash.comMore Than Just a Technology Platform

What sets INVIOU apart from other factoring services is not only its technology, it’s also its ambition to be a platform. It does not aim to compete with banks, lenders, and technology platforms like Fundbox and others. These and other creditors become part of INVIOU’s community and ecosystem. INVIOU aims to build a community around itself, providing SMBs and creditors with access to a shared platform. Transactions on the platform strengthen the community. As transactions are made, the virtual credit score for SMBs using the platform is backed up with further proof and becomes more reliable. Each transaction reduces the risk for lenders and enables the SMBs to get better rates.

While many startups strive to bring blockchain to the mainstream, INVIOU may have a product that makes actual business sense.

Disrupting Credit Scores With Blockchain was originally published in Hacker Noon on Medium, where people are continuing the conversation by highlighting and responding to this story.