(This article was written by Angie Lin, co-founder and chief investment officer of Assured Asset Management, and posted in the Masters’ Opinion in Commercial Times on 26 Feb, 2020).
While corporate financing is difficult in an ordinary business climate, many enterprises are currently facing heightened financing challenges in light of the recent novel coronavirus outbreak. Business integrity can help smooth the financing process; however, financiers cannot take a company at its word alone. The immutable, traceable, and transparent nature of blockchain technology establishes a foundation of trust for all parties involved in supply chain finance, alleviating a significant pain point in the financing process. Many enterprises are already using blockchain-based supply chain finance solutions to solve financing issues. It is anticipated that many more will adopt a similar approach as the dust from the coronavirus epidemic settles.
Blockchain will launch a new era for supply chain finance
The supply chain finance ecosystem has many stakeholders, including financial institutions, anchor corporations, upstream and downstream enterprises, and logistics companies. Financial institutions provide the primary source of financing within the ecosystem. However, as informational transparency declines quickly within deep tier supply chains, financial institutions have traditionally elected to typically only service Tier 1 suppliers. As a result, online SME lending platforms that offer rapid and convenient lending services have boomed in recent years, though these services typically have a high initial loan threshold and bear high price tags.
Blockchain technology seemingly offers a solution to these core issues. The immutability of distributed ledger technology ensures traceability and authenticity of supply chain data and allows different stakeholders to access the same source of information. As such, risk within supply chains can be better managed through access to transparent supplier records and improved visibility into industry chains.
Blockchain technology not only clarifies the relative relationship between upstream and downstream enterprises within a supply chain, but also incorporates SMEs into the network to create a more efficient financial ecosystem. As a result, supply chains become more efficient to manage, borrowing costs for anchor corporations are reduced, and SMEs have easier access to cheap capital.
Blockchain-based supply chain finance brings two major changes
Similar to how technological innovation has revolutionized the financial services industry, blockchain technology is reshaping the supply chain finance field in the following ways:
- Technology-enabled supply chains have increased access to a diverse range of funding providers rather than solely relying on traditional financial institutions. Modern technology has expanded the scope of financial services outside that of traditional financial institutions. For example, the Traceable Account Payable (“TAP”) platform offers the ability to split debt and distribute it to different stakeholders within an ecosystem. Within the context of supply chain finance, this allows for anchor corporations to issue account receivables as “digital payment certificates,” which can then be split, transferred, or financed. As a result, the role of traditional financiers within supply chains has fundamentally changed, as other ecosystem stakeholders, professional investors, financial institutions, or even corporate foundations can now fill the role of financier.
- As information continues to populate a blockchain, new solutions for supply chain challenges will emerge. Because there has previously been no ability to aggregate supply chain data in an online database, information regarding the quality of supplier goods as well as delivery and payment timeliness has historically relied on word of mouth between anchor corporations and suppliers – which is both time-consuming and prone to inaccuracies. A blockchain-based supply chain finance solution can improve the situation. As information regarding anchor corporations and downstream suppliers go online, updates on payment statuses, product quality, timeliness of delivery, and other information can be measured. Practices can be improved and more business applications can be introduced into the ecosystem.
The ability to access verifiable information on upstream and downstream suppliers deep within a supply chain has encouraged many anchor corporations to begin offering their own supply chain financial services. As a result, anchor corporations are able to increase their bargaining power and reduce procurement costs while deploying idle funds through new investment channels. In times of economic uncertainty like the coronavirus has brought, anchor corporations may turn to the government for financial assistance, in which case both the anchor corporations as well as SMEs within the supply chain will benefit from transparent and detailed records. A platform like TAP will allow for flexible financing based around the needs of ecosystem stakeholders through splitting, transferring, and financing of digital payment certificates while ensuring that clear records are kept.
One approach to solve endless enterprise supply chain financing problems and overcome difficult times
There are concerns about how to ensure the accuracy and authenticity of data initially recorded on the blockchain. Fake transactions and data inaccuracies can be solved through accounting audits and other third-party checks while built upon through smart contracts and similar practices. Given that autonomy is the driving force behind blockchain technology, once deployed, a blockchain-based platform will run autonomously, and any inaccuracies will eventually be identified.
The benefits of blockchain-based supply chain finance are not only limited to solving the financial needs of a particular enterprise, rather can improve the health of the overall industry and all stakeholders within it. During these challenging times, innovations like this can help stabilize core enterprise operations and SME financing needs while driving the industry forward. When the epidemic clears and the business environment normalizes, a stable supply chain will position enterprises and industries well for expedited growth.