Is blockchain in your future planning for HR and payroll? It should be!
In this, the first of a series of three blogs on blockchain for HR and payroll professionals, I layout the importance of developing an early understanding of blockchain. While it is unlikely to have an immediate impact, it certainly will do soon.
How soon? This depends on where you work and the set-up of your workforce.
What is blockchain?
If your first thought was ‘Bitcoin’, then you’re not entirely wrong: Cryptocurrencies including Bitcoin, often referred to as “digital gold”, are the highest profile uses of blockchain technology, and the ones that grab the headlines.
However, Blockchain is the underlying technology, very much the unsung hero. Rather like a secure ‘internet’, blockchain enables digital information to be distributed, not copied, making it highly secure. It would, therefore, only be time before new uses would be found for the technology.
HR and payroll processes are ideal for blockchain
HR and payroll are both very data rich processes. With GDPR and the tightening of all data compliance legislations around the world, the movement of personal data has never been higher risk for an organization.
If we look at payroll, for example, think about how an employer pays employees today:
1. Payroll is run
2. Bank file containing all payments is created and sent to the bank
3. Bank processes the file and takes money from the employer’s bank account to deposit into the accounts of the employees. This takes several days, with the bank acting as the paid trusted middleman.
4. Trusted middleman stores the [highly confidential personal] account data on its own servers. End-users have no means to check the validity or security of the databases, having to trust the bank to ensure correctness and protection against falsification.
How could you remove bank clearing from the payroll process?
Easily it seems. Blockchain builds a secure and trusted ledger across a decentralized infrastructure, often called the Distributed Ledger Technology (DLT).
Picture source: www.lpea.lu
When a transaction is made, DLT broadcasts this to all parties in the network (nodes), who then validate and approve it. The data is encrypted and appears anonymous to anyone not directly involved in the transaction.
Once the transaction is completed a new ‘block’ is created and added to the existing ‘chain’ of transaction records, hence the term, blockchain.
The hash or signature of the existing blocks is added and encrypted, making the chain of blocks tamper-proof and creating a permanent and transparent ledger, guaranting the security of data and the blockchain technology.
When there are any data changes, each node receives a synchronized copy of the data and the integrity of the transaction can only be established once all parties have approved.
If an intruder wants to hack into the system they have to do so simultaneously on all blocks on all nodes at the exact same time. This is thought to be virtually impossible to do.
What is a DLT “transaction”
Distributed ledgers can be public, private and vary in structure and size and so the transaction can mean different things, for example;
- a payment between two parties
- a validation of a document
- a verification of someone’s identity, etc.
All transactions are captured, but instead of storing them in a centralized database (think bank), the transactions are encrypted, and an update sent via the decentralized network. The blocks are then updated and reflected in the chain. Some will be recorded as ‘public ledger’ so every user can trust that the blocks are secure.
How will blockchain improve the efficiency of payroll?
When your employees all live in the same country, the payroll process is relatively straightforward. The more countries you add, the more complex global payroll becomes and the longer money can take to transfer. Add into this currency exchanges and you're also adding bank charges additional fees.
It is because of these complexities that organizations usually engage third parties to handle international payroll payments but, if you were to use DLT to issue that same payment, you would see significant improvements.
Payroll benefits of blockchain:
1. Money moves faster – when the employer initiates the payment there is a direct connection via DLT to the account of the employee, so they receive their payments quicker
2. Eliminate the middle man – DLT replaces the middleman by guaranteeing the security and validity of each transaction, enabling peer-to-peer payments. When making cross-border payments, it also reduces currency volatility, where (hourly) changes in exchange rates can be taken advantage of by intermediaries.
3. Lower transaction costs – Using DLT there are fewer parties involved and the transaction fee is a fraction of banking fees
4. Payment flexibility – employees can redirect payments and share wages earned with (overseas) family, with no or low remittance fees
5. Transparency – with DLT you always know the exact status of a payment
6. Better security – DLT is encrypted and distributed and so virtually impossible to falsify
Benefits of blockchain for contingent and gig economy workforces
Blockchain is idea for paying people working on an irregular or one-off basis. Smart contracts can be easily be stored on DLT. As soon as work is completed, and / or a timesheet approved, payment can be made immediately, even to employees without a bank account.
There are currently thought to be two billion people globally without bank accounts, so this is a significant enhancement to payroll processing. DLT will provide the opportunity to create a digital bio-identification straight from their smartphones and use this to access a digital wallet platform and send payments.
A word of caution
While it’s good to experiment with new technologies like blockchain, always verify that you are compliant. As with many new technologies, it an take a while for governments to catch up. In many countries it remains illegal to pay someone who does not have a bank account, or to use a payment system that’s not visible to the authorities for reasons of fraud detection.
As a payroll provider, how is NGA HR innovating with DLT?
As global payroll provider, NGA HR is piloting several use cases of DLT. We want to be sure that when the time is right we’re in the best position to take full advantage of this exiting technology in our client payroll service delivery processes.
My colleague, Johan Bosschaerts, SVP Technology, Innovation and Solutions at NGA HR, has added the following insights to this blog:
If you take the payroll process, security is fundamental, but security is only as strong as the weakest point in the whole chain. So, when you redesign the payroll process on DLT, it’s crucial to apply security consistently throughout the whole process.
In the case of payroll, from the moment NGA HR receives data via the client’s cloud HRIS, DLT enables us to put this data into a secure and trusted ledger. This allows us to log all events so they can’t be tampered with.
For added security, we can add contextual access security using access keys: when NGA HR, as data processor uses its key, it provides a different type of data access to when the client (employer) is using their key.
Similarly, when an employee calls with a payroll question, they can use their key to grant the service agent read-access to the data. Once the call ends and the agent closes the tickets, the access is revoked.
Throughout the whole payroll lifecycle (except for the black box payroll run itself), employee data and transactions are only stored in and referenced via the ledger. This ensures single data storage for all dependent systems, for example, MyHRW (case management system) or PEX, to reference.
Rather than copying data between systems and holding copies in multiple databases (high security risk), the DLT would work as the single trusted source of data to be referenced by other systems when data access is required.
In redesigning the payroll process using DLT, NGA HR can provide a secure service to clients, who can trust that PII (Personally Identifiable Information) is and remains only in authorized hands.
While we are exploring blockchain / DLT as a promising technology for payroll, we are also at NGA HR, pursuing other use cases in the HR domain. Personal data and recruitment are prime cases. We’ll discuss these in a next blog post.