How Usage-Based Payments are Enabling Blockchain-Based Integrated Business Ecosystems

The blockchain-enabled data integrity facilitates new forms of inter-organizational and inter-industry collaboration, serving as a backbone for applications in areas such as Industry 4.0, Mobility and Energy whilst being settled with a pay-per-use scheme. Previously, costly and incompatible intermediate stages of the business process, caused by incompatible ERP systems, data silos, different company policies, and a lack of trust, are thus merged and harmonized over the entire business process lifecycle and are monitored by the conditions of a smart contract. Hence, the blockchain’s characteristics of transparency, immutability, and cryptography are the cornerstones for the emergence of inter-company and inter-industry collaboration. This creates a high level of trust among participants of integrated ecosystems, permitting a high degree of automation with auditable parameters and simultaneously reducing the need for human intervention to a minimum.

Authors: Philipp Schulden, Thomas Faber, Philipp Sandner

Blockchain-enabled integrated business ecosystems prospectively lead to a new level of cross-industry and cross-sectoral collaboration between firms. The resulting interoperability results in an outward reorientation of the participating organizations, enabling individual entities to be part of a globally networked economy. The outward-looking re-orientation of the companies allows for a reciprocal exchange of data, which will result in a highly collaborative and diverse ecosystem. Yet, in such ecosystems, the blockchain can only develop its potential and create added value in convergence with other emerging technologies. Such ecosystems receive data recorded by Internet of Things (IoT) devices, which is then administered and verified by the blockchain to consequently being automated by artificial intelligence. Therefore, within the following description of blockchain-enabled ecosystems, blockchain primarily acts as the basis-layer for the encrypted and transparent transferral of data and as a means to automate, structure, and orchestrate the data flow between the associated parties.

Applicability of blockchain-based integrated business ecosystems

Blockchain-based pay-per-use as a facilitator for inter-company and cross-industry collaboration

Roles of the ecosystem participants

  1. The machine manufacturer produces the machine and delivers it to the production site of the machine user. The machine is equipped with multiple sensors to measure the machine’s utilization. This data is then used to provide the machine user with a usage-based invoice (pay-per-use). The usage data generated is also transferred to a bank in the same ecosystem in order to enable the machine manufacturer to obtain usage-based loan-repayments in order to bridge the production costs.
  2. The machine user orders the machine from the machine manufacturer. It is not purchased or leased at predetermined rates as in conventional models but is instead billed according to actual machine utilization. The generated sensor data is also transmitted to an insurance company within the same ecosystem, allowing the machine user to be offered a usage-based insurance premium.
  3. The bank receives the usage data of the machine’s sensors and thus can offer usage-based loan repayments to the machine manufacturer.
  4. The insurance company receives the usage data of the machine’s sensors and thus can offer a usage-based insurance premium to the machine user.

Role-specific benefits of using an integrated and cross-sectoral blockchain-based ecosystem

Machine manufacturer

Machine manufacturers are highly dependent on economic cycles, as machines are only demanded if the general order situation of e.g. OEMs is favorable. The often considerable investment requirements of machine users make it difficult for machine manufacturers in economic downturns to ensure a sufficient turnover. Also, machine manufacturers are increasingly under pressure as machine users demand new financing methods. With a blockchain-based pay-per-use model, data can now be transferred in a verified, encrypted, and transparent manner to make such new payment schemes viable. This provides the machine manufacturer with the basis for cost-covering machine turnover even in economically difficult times, as the acquisition and lending risk of the machine users is considerably diminished.

Machine user

While in the traditional world the acquisition of new equipment requires high upfront capital expenditures, the pay-per-use payment model links costs to the actual use of the machine. This provides machine users with a new opportunity to improve their cash flow and financial flexibility. Since the machine user no longer has to deal with the linear depreciation of the equipment, the associated operational risks (e.g. underutilization due to empty order books) are transferred to the equipment manufacturer and the bank respectively. This makes machine users more resilient to economic downturns or seasonal cycles. The machine user also benefits from tailor-made, usage-dependent insurance premiums that are calculated based on e.g. machine utilization (higher machine utilization leads to higher default risk and vice versa).

Bank

Even in weak economic periods, the pay-per-use payment structure enables machine users to invest strategically as they have greater financial leeway. As a consequence, the demand for investment loans increases for banks, enabling them to sell their products in times when they would otherwise not have been sold. Additionally, banks can expand their offering to new foreign markets as blockchain technology guarantees data streams that cannot be tampered with. In the event of the machine user not paying for the use of the machine, the machine can be shut down remotely. Thinking ahead, all machines in the ecosystem could be tokenized and traded in the form of entirely new financial products on blockchain-based capital markets.

Insurer

Insurers have been dealing with intense competition and rapid digitization of the sector. To keep up with innovative new fintech players, established insurance companies have to transform their product strategy, company culture, and IT infrastructure. Although the pay-per-use ecosystem is no allrounder to counter these challenges, it has the potential to create a competitive advantage through the aforementioned usage-based insurance premiums for machine users. Insurers can use it to tailor their products to the machine user in an unprecedented individuality. Being a pioneer in usage-based premium offerings may, therefore, opening up completely new markets and customer groups for insurers.

Conclusion

Remarks

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Philipp Schulden is the chief operations officer of the Frankfurt School Blockchain Center at the Frankfurt School of Finance & Management. In the blockchain environment, he has supervised numerous international projects and research initiatives. He also possesses expertise in the field of application possibilities of blockchain technology in the area of Industry 4.0. He completed his studies in Management (M.Sc.) in Germany, Russia, Peru, and South Korea. You can contact him via mail (philipp.schulden@fs-blockchain.de) and LinkedIn (https://de.linkedin.com/in/philipp-marcello-schulden).

Thomas Faber is a research fellow at the Frankfurt School Blockchain Center and a project manager at the International Token Standardization Association (ITSA). His areas of interest include distributed ledger technology (DLT), security tokens (STOs), crypto-assets as well as blockchain ethics and blockchain-related sustainability issues. Mr. Faber holds a B.Sc. degree in Management, Philosophy & Economics as well as an M.Sc. degree in Management with a focus on digital business models from the Frankfurt School of Finance & Management. You can contact him via mail (thomas.faber@fs-blockchain.de) and LinkedIn (https://www.linkedin.com/in/thomasmartinfaber/)

Prof. Dr. Philipp Sandner is head of the Frankfurt School Blockchain Center (FSBC) at the Frankfurt School of Finance & Management. In 2018, he was ranked as one of the “Top 30” economists by the Frankfurter Allgemeine Zeitung (FAZ), a major newspaper in Germany. Further, he belongs to the “Top 40 under 40” — a ranking by the German business magazine Capital. The expertise of Prof. Sandner, in particular, includes blockchain technology, crypto assets, distributed ledger technology (DLT), Euro-on-Ledger, initial coin offerings (ICOs), security tokens (STOs), digital transformation and entrepreneurship. You can contact him via mail (email@philipp-sandner.de) via LinkedIn (https://www.linkedin.com/in/philippsandner/) or follow him on Twitter (@philippsandner).

Entwicklung und Einsatz von Blockchaintechnologien für die Industrie 4.0 — gefördert durch das Bundesministerium für Bildung und Forschung