Blockchain, HR & Payroll: What does the future hold?

Is blockchain in your future planning for HR and payroll? It should be!

If you are in payroll, you’ll need to develop an understanding about blockchain. It won’t directly affect your work today, but it certainly will make an impact in the near future. How near? That depends on where you work.

So what is blockchain?

If your first thought was ‘bitcoin’, then you’re not wrong: Cryptocurrencies like bitcoin are the most prominent use of blockchain technology, and the one that grabs a lot of headlines. Blockchain is the technology that enables bitcoin. But blockchain is so much more.

Think about how an employer pays her employees today: after payroll is run, a bank file containing all payments is created and sent to the bank. The bank processes this file and takes money out of the employer’s bank account to deposit it in the accounts of the employees. It can take several days to move money from one account to another. In other countries, employees receive paper checks, which they take to the bank to receive their money.

In both cases you use a trusted middle man (“the bank”) to move money around. The bank stores information about each account in a database on its own servers. But the bank is not a charitable organization and charges both parties for its services.

While money is being moved, it’s unclear where the money resides or how long it takes. And finally, end-users can’t check the validity or security of the underlying databases and must trust the bank to ensure correctness and protection against falsification.

What if we could remove the “trusted third-party” from the equation while ensuring that the authenticity of each transaction is securely captured and validated?

Distributed Ledger Technology

That is where blockchain comes in: it builds a secure and trusted ledger across a decentralized infrastructure, also called Distributed Ledger Technology (DLT). When someone makes a transaction, that is broadcasted to all parties in the network (nodes), who validate and approve it.

The data is encrypted and anonymous to those who aren’t directly involved in the transaction. Once the transaction is complete, a new block is created and added to the existing chain of transaction records (that’s why it’s called blockchain).

The hash or signature of previous blocks is added to the current block and then encrypted – as such the blocks can’t be changed or tampered with. The chain provides a permanent and transparent ledger, ensuring that the historical record of data becomes unchangeable. The distributed ledger guarantees the security of this technology.

When data changes, all nodes receive a fully synchronized copy of the data – and so each member is essential in establishing the integrity of every transaction.

There is no centralized version, and if an intruder wants to break into that system, they must break in on all the same blocks on all nodes at the exact same time, which is virtually impossible. Distributed ledgers can be public or private and vary in structure and size.

When using DLT, a “transaction” can mean different things:

a payment between 2 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 (remember the bank), transactions are encrypted, and an update is send across the decentralized network.

Every time a transaction takes place, the blocks are updated, so the chain accurately reflects the change. And because transactions are recorded as a ‘public ledger’, every user of the blockchain can trust that the blocks are secure.

How will blockchain change payroll?

When your employees live in the same country, the process is straightforward, and you need the bank to issue payments. It gets more complex when you need to make cross-border payments because you employ expats.

There is additional wait time when money travels via the banking system from one country to the next. When you send a check, the employee pays a fee to the bank to cash it. And when currency exchanges are involved, the bank charges additional fees as exchange rates. Because of these complexity, companies typically engage 3rd parties to handle international payments.

Suppose you use DLT to issue that same payment? What would change?

When using blockchain, you can achieve the following benefits:

Money moves faster: when the employer initiates the payment there is a direct connection via DLT to the account balance of the employee, so employees receive their payments quicker

Eliminate the middle man: you don’t need a trusted 3rd party in the middle, because the DLT guarantees the security and validity of each transaction thus 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.

Lower transaction costs: Using DLT there are fewer parties involved and when you move money the transaction fee is a fraction of banking fees

Payment flexibility: employees can redirect payments and share wages earned with (overseas) family, with no or low remittance fees

Transparency: with DLT you know the exact status of the payment at all times.

Better security: because DLT is encrypted and distributed, it is virtually impossible to falsify content.

Blockchain payments enable the gig economy

An employer can enter into a smart contract stored on DLT, and when the work is delivered, the payment happens immediately. Same day payments are important for these workers, as they want to be paid in real time to eliminate dependency on payday lenders.

And it’s not limited to these workers: permanent employees welcome the flexibility to receive instantaneous payments too.

A further benefit is that blockchain allows payment to people who don’t have a bank account. These individuals (estimated at 2B people globally) would have an opportunity to create a digital bio-identification straight from their smartphones and use that to access a digital wallet platform and accept payments.

A word of caution

As often with new technologies, it takes a while for governments to catch up.

Paying for work is subject to taxation, social security and other contributions and regulations. In many countries it’s illegal to pay someone who does not have a bank account or use a payment system that is not visible to the authorities for reasons of fraud detection. While it’s good to experiment with new technologies like blockchain, always verify that you are compliant.

As a payroll provider, how will NGA HR use DLT?

The examples above give you some background on the benefits of using DLT in the payroll process. As global payroll provider, NGA HR is piloting several use cases on DLT, to ensure that we take full advantage of this exiting technology in our client service delivery. Johan Bosschaerts, SVP Technology, Innovation and Solutions, adds the following insights:

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 in a secure and trusted ledger. This allows us to log all events, so they can’t be tampered with. We can also introduce contextual access security, depending on access keys: when NGA HR as data processor uses its key, that provides a different type of data access than the client (employer) has using their key.

Similarly, when an employee calls with a payroll question, they can use their key to allow the service agent read-access to the data. When 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, ensuring single data storage, that all dependent systems, like MyHRW (case management system) or PEX would reference to.

So instead of copying data between systems and holding copies in a number of databases, the DLT would work as a trusted source of data that is 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 in authorized hands.

While NGA HR is exploring blockchain/DLT as a promising technology for payroll, we are also pursuing other use cases in the HR domain, like for personal data and recruitment. We’ll discuss those in a next blog post.

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Malcolm Bennett

Malcolm Bennett has been NGA Human Resources Group Counsel and Company Secretary since January 2015. He was previously Associate General Counsel for over 13 years with IBM and previously held legal positions with CMS Cameron McKenna and BHP Billiton prior to that.

Malcolm has experience in managing teams/departments and structuring and negotiating complex commercial transactions in multiple jurisdictions – he now leads a small team of legal, compliance and security professionals for NGA HR across the globe.

He studied Law at the University of Cape Town and now resides in Manchester with wife and son.

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