There are several ways blockchain-driven supply chains financing can make the system more efficient.
Technology is one of the crucial enabling factors in supply chain finance, since the improvement of software and platforms allows businesses to come together and speed up process flows throughout the supply chain, enabling various forms of financing solutions—from dynamic discounting to a more complex ‘reverse securitisation’. Nevertheless, some barriers still exist and have significant negative impact on the value created for supply chains and investors alike. This post analyses the available opportunities in blockchain-driven supply chains financing and considers some alternatives that could be considered for an efficient supply chain.
Supply chain process through blockchain
A typical supply chain process constitutes the processing of the flow of trade document using the Blockchain Development Company as the underlying database layer, which will guarantee the authenticity and allow the straight through processing in the invoice approval. The traded goods are also uniquely identified and submitted to the custody of a smart contract, which guarantees that a payment will be processed if certain events are satisfied (eg: successful shipping). Using blockchain could, therefore, result in higher levels of trust in commercial relations, cheaper transaction costs and fast processing of claims.
1. Efficient processing:
Since the underlying criteria for the success of supply chain finance is the efficient and fast processing of supply chain data, automation plays a crucial role in the acceleration and dematerialisation of processes. Though a certain level of such automation is already available in ERP systems, a back-end blockchain system could further enhance the automation of such processes, since fully digital and signed delivery documents, such as ‘bills of lading’, would exist on it. The earlier the invoice is approved, the longer the time interval in which financing is possible.
2. Efficient cash settlement:
An interesting feature is the opportunity offered by smart contracts to create a one-layer invoice payment system. ‘Smart invoices’ could be paid automatically at maturity to reduce manual intervention and ease the processes. Such possibilities, however, already exist with modern ERP systems: payments can be made automatically via a payment programme that retrieves all authorised invoices within a specified time frame and automatically generates payments. Improvements offered by distributed ledger technologies (DLTs) for the bank-driven payment systems would allow faster cash settlement and lower transaction fees with benefits for the entire supply chain finance (SCF) community. Multi-currency and global supplier-base programmes would particularly benefit from lower transaction costs in such a scenario.
3. Easy validity check of invoices:
Since legal validity of invoices is a major issue for SCF programmes, blockchain can help in validating invoices easily. In typical SCF programmes, the buyer has the risk of double payment in cases where invoices were already sold to a third party. Second, as the existence of undisclosed assignments in the purchased receivables portfolio cannot be determined by the financing party, the risk needs to be mitigated by a strong ‘promise to pay’ from the buyer. By assuring legal validity through blockchain, the ‘promise to pay’ can be phrased less strongly (what helps the issue of accounting treatment), and the overall risk of the structure is reduced, which helps all parties of the SCF programme.
In certain cases, the buyer/debtor may not be usually known by the financing parties in supplier-oriented financing solutions. Because there are players in the market (eg. banks) that are obliged by internal rules to perform checks on the legal validity of invoices, appropriately tokenised invoices would bring advantages for approved payables finance as well as supplier-led financing solutions.
4. Reverse securitisation:
The use of a shared and trusted database layers can also support the financing process, beginning with the programme setup until the key day-to-day operations, which include the invoice approval, note’s issuance and related post-trade processes, payments and compliance activities. This technique of reverse securitization is useful in solving major efficiency issues in supply chain financing.
5. Integrating money and product flows:
Being largely event-driven, supply chain finance could strongly benefit from a technology having the capacity to trigger points to key events in the supply chain. This offers the possibility to track the product along the supply chain through immutable, tamper-proof, and real-time data offered by a blockchain solution. This also provides a greater trust and availability to data consumers, and generates authoritative records for the execution of smart contracts and automation in the creation of trade documents.
The trigger event in reverse factoring is the invoice approval, which allows the release of the funding against the approved payables. At this stage, the related risks depend only on the credit risk of the buyer, because the willingness to pay is confirmed (i.e. delivery is matched and payable approved), and any tracking information of the physical supply chain would become obsolete for this type of instrument. For this reason, integrating product and money flows is interesting only for SCF instruments that are triggered in the pre-shipment phase, such as inventory financing or PO financing.
Hence, it could be seen that blockchain offers considerable opportunities to automate and incentivise a trust-based supply chain financing and could go a long way in radicalising the way supply chains function. The above opportunities could be exploited in delivering a resourceful supply chain system and finance.
The major trade and receivables finance blockchain consortiums such as we.trade, Marco Polo, Komgo and Voltron, will gather at BCR's conference "Consortia 2019" in London this May. For more info on this event, please click here.