Industry Network 2.0: From Transferring Data to Settling Transactions

Industry Network 2.0 could also be called a “clearing network’’ and refers to a network that has the power of approving business transactions conducted on that network. Today, clearing transactions between two parties is often an expensive proposition whether two parties are transferring ownership of a house or two companies are transacting within a supply chain. When goods and money need to change hands, transactions can be complex. Ensuring that no errors are made requires manual processing, extensive research, and back-and-forth communication costing both sides valuable time and resources. The key difference between Industry Network 1.0 and 2.0 is the ability to prevent such errors and provide seamless resolution for exceptions that do not lead to disputes.

There is currently no definition for the concept of an Industry Network, so we will start by providing one:

An Industry Network is the collection of electronic protocols used by companies to do business with each other.

Protocols range from network protocols such as FTP for transferring files to data format protocols such as CSV, or from general-purpose ones such as SMTP for email to more specialized protocols such as EDI.

Industry Network 1.0

Today, Companies use electronic protocols to exchange information or data with trading partners. The technological makeup of protocols reflects this and typically includes “transfer mechanisms” (FTP, AS2), “data formatting” (CSV), and “data semantics” (EDI).

However, exchanging information is not really the intent. Companies exchange data and information to transact with each other, for example: sold products, returned products, payments, reimbursements, etc.

Data transfer is inadequate to complete transactions, and so Industry Network 1.0 can not facilitate the process of transaction settlement. Instead, transaction settlement is carried out by the two transacting parties:

1. One party initiates the transaction, evaluates the transaction, bundles it in a file (e.g., EDI file) with other consistent transactions.
2. The file is transferred over the Industry Network 1.0
3. The receiving party unbundles the file and re-evaluates all the transactions using a different back-end, different business logic, and often different reference data.

Figure 1 — Current methods of companies transacting require the sharing of transaction-related data through Industry Networks, and then the settlement of transactions is done inside each company.

The process is very inefficient, and both parties need to deal with a host of issues:

• Duplicated effort — Both parties are doing the same work using different technical and human resources.
• Disputes — The use of different business logic and reference data leads to different results
• Expensive error management — Errors and disputes are resolved via email messages, phone calls, and meetings. Certain transactions result in a 3%-5% error rate on millions of transactions, requiring large staff departments to resolve errors.
• Clearing delays — Certain business transactions require a minimum of 3 to 5 days to be cleared, and in some cases, weeks or months. As a result, large working capital is often allocated towards managing the risk of this “transaction purgatory.”
• Manual reconciliation — Complex error situations might require manual reconciliation because it is difficult to understand what the source of the error is

Industry Network 2.0

Today’s technology allows for a step function transformation in how transactions are executed. I. Instead of simply transferring data, the Industry Network 2.0 acts as a “virtual clearinghouse” capable of providing immediate feedback to the submitted transactions and, if valid, instantly adjudicating them.

The virtual clearinghouse comes into existence because the Network leverages blockchain technology, which provides state and computation to the Network itself. The data is also kept confidential by adopting advanced cryptography such as Zero Knowledge Protocols.

The parties agree on business rules which are committed to the Network. The Network also contains all the necessary state and industry data by ensuring that all trading partners have a unified view of transaction-related data. Once a transaction is submitted, there is a single source of truth used to settle the transaction. As soon as that happens, all the interested parties are immediately notified of the settled transaction.

Figure 2 — Industry Network 2.0 acts as a virtual clearinghouse for any number of transacting parties, where the reference data is shared through the same network, and then rules are automatically enforced on transactions against that reference data.

This is a paradigm shift that brings massive benefits to the business:

• Automation — More aspects of the business process are automated, and a better foundation is available to automate downstream processes further.
• Low operational costs — Less workforce is needed to operate and supervise these processes.
• Confidence in adjudication — There is higher confidence gained by rules that are well established in the virtual clearinghouse and cannot be unilaterally “bent.”
• Real-time — Feedback is provided immediately, which is also critical for invalid transactions. The party that has submitted them can immediately take corrective actions and resubmit.
• Simplified audit — The Network has a “cryptographic memory,” which allows third parties to independently verify the truthfulness of reported statements. For instance, a company can prove that a certain product was sold for a certain amount without disclosing any other information.

Healthcare example: Chargebacks

The Chargebacks process facilitates drug pricing discounts offered to hospitals and other drug dispensers by wholesalers, based on contract pricing from manufacturers. The following steps outline this process (dramatically simplified):

1. Manufacturers sell a drug at a “list price” (called WAC) to Wholesalers.
2. Manufacturers have discounted pricing agreements with Dispensers (e.g., hospital, clinic).
3. Wholesalers honor such agreements and sell at a loss to the Dispensers.
4. A wholesaler that made a sale to a dispenser turns back to the manufacturer and asks for the difference — a “chargeback” — to make the financial transaction whole.
5. The manufacturer refunds the chargeback if the correct price was applied.

Even for those who are not familiar with the process, it is easy to see many challenges: Was the correct price applied? Was the Dispenser still eligible for the price? Did the sale actually happen, or was the product returned? These are straightforward questions, but those who work on chargeback transactions know that the complexity is much higher, and many exceptions need to be handled. Such complexity is often resolved by a continuous ping pong of data, emails, and phone calls between the involved parties.

Figure 3 — Complex financial processes like the chargebacks process in healthcare have many different types of transactions. Each has its own rules, and all require extensive manual processing and error resolution, and even then, revenue leakage still occurs.

The Industry Network 2.0 is capable of automating such complexity by orchestrating the transactions between the parties. All parties are constantly updated on the events that are happening while the Network is validating any transaction that is posted in real-time.

Figure 4 — With an Industry Network 2.0, like the MediLedger Network, chargebacks and all subsequent transactions can be automatically adjudicated by the network itself against unified reference data like GPO membership, customer identifiers, and contracts.

The concept of a clearinghouse exists in many different industries for settling transactions between two parties. Financial services, in particular, has transactions settled by clearinghouses for many high volume transactions such as consumer spending (Visa) or equities trading (CME Group). However, even in these situations, settlement is centralized. Through blockchain technology, no 3rd party is involved in the clearing of transactions; instead, the network itself contains the business logic and reference data. Thus, the future of B2B commerce is truly streamlined transactions from start to finish, without any 3rd parties involved.