Blockchain and Supply Chain Finance
Supply Chain Finance (SCF) represents the bridge between an enterprise physical and financial supply chains, with blockchain as the underlying operating system.
Enterprise decision makers are excited when they learn that blockchain technology enables peer-to-peer (P2P) collaboration in which buyers and suppliers connect directly and form online networks, removing in a collaborative business-to-business (B2B) environment the need for middlemen and intermediary operators. Slowly but steadily, treasury is taking centre stage and becomes the hinge between the corporation and the bank. Treasurers are the natural counterparts of banks, so they are the best channel the bank should use to understand the critical elements that corporations use to implement successful collaborative supply chains. With that knowledge, the bank will be capable of interacting with its corporate clients and offering more services.
Businesses see the importance of liquidity and risk management in the future, but they have not yet deployed a solution to monitor, in a P2P fashion, areas such as cash flows, payments, and risk exposures. Business partners have to agree upon a series of elements to build a solid collaborative supply chain, and banks must be aware of these elements to proactively offer solutions and increase their reach to supply chain clients.
A B2B relationship is made of buyer – supplier pairs, with a relatively high level of trust between the two. While, in fact, the level of trust could be nil (or very low) between an exporter and an importer that are at the edges of the B2B value chain, this is certainly not the case between the paired parties. So, if each pair on the B2B value chain intrinsically trusts each other, what additional contribution could blockchain bring?
Furthermore, there is a clear shift to trade on open account terms: open account occurs when a seller ships the goods and all the necessary shipping and commercial documents directly to a buyer, who agrees to pay the seller’s invoice at a future date. Open account is typically used between established and trusted traders. That has compelled the banking industry to seek to re-engage with buyers and suppliers by developing a blockchain-based value proposition aimed at meeting the needs of traders operating on these open account terms.
However, if open account transactions are founded on trust and keep banks out of the picture, why should corporate trade partners want to get them back with blockchain?
The answer may reside in the corporate-centric approach that banks are putting at the core of their delivery strategy. As soon as a bank places the corporate customer at the centre, that bank has to follow the peculiar business dynamics that influence and shape the client’s business decisions. Most of these decisions originate from working capital dynamics which directly impact the supply chain, and, in a globalized world, supply chain collaboration is one of the most highly prioritized corporate objectives. Banks have recognized the elements that motivate supply chain business partners to collaborate, and SCF is the means that banks use to reap the rewards of anticipating and servicing corporate working capital needs.
Payables, receivables, inventory finance, and documentary credit (all components of SCF) are the best proxies of how financial instruments offered by banks tightly interconnect with the supply chain processes managed by corporate clients. Collaborative supply chains built on blockchain-based technologies, organizational structures, and practices can strongly support banks’ and companies’ decisions on which SCF and treasury solutions to address.
SCF requires, for instance, the global recognition of the assignment of title (e.g., the invoice) by all parties involved. Since the quality of supply chain relationships and trust are prerequisites for SCF excellence, blockchain-based applications could provide the solution that consolidates and entrusts the collaborative relationship of those parties.
SCF brings also the benefit of harmonizing payment terms globally. Just as logistics service providers bring more efficiency to the physical movement of goods once the service is outsourced to them, in SCF a bank can be similarly considered a provider of outsourced services that streamline payments and optimize a company’s working capital. Collaboration between supply chain partners increases visibility and trust, so banks must be alert to detect signs of their corporate clients’ cooperation in order to anticipate their needs and offer appropriate SCF solutions and services. Blockchain-based smart contracts can be used to “consume” supply chain data exchanged between manufacturers, retailers, and their suppliers to better serve collaborative supply chains and anticipate SCF business needs (e.g., discount a batch of invoices; apply for pre-shipment finance).
Lastly, while a significant portion of SCF programmes are still anchored around sub investment-grade companies, innovative SCF programmes are expanding to more participants than the anchor buyer and its key selected suppliers. The need to reach the “long tail” of suppliers demands solid business relationships and levels of trust that allow for open accounting transactions, the prerequisite—as already seen—of any SCF initiative. As SCF is becoming a well-accepted asset class on its own, investors and credit insurers want to be part of the game and need to interact more with trading parties to find proper sources that create more liquidity for SCF schemes. Blockchain-based data collection will allow to create innovative company credit risk models, blending financial indicators with B2B supply chain performance metrics captured across P2P exchanges.
To summarize, blockchain may be perceived today as the enemy of all intermediary business, as it eliminates the need to have a central controlling entity responsible for safekeeping trading records. The complexity of technologies that support supply chain collaboration may however offer banks a reason to react and reap the business opportunities brought by the advent of innovative and potentially disruptive technologies that improve the offering and delivery of SCF instruments.