SPECIAL REPORT TRADE FINANCE payables financing and dynamic discounting. The money may flow from the apex buyer’s treasury, a bank with an active transaction banking practice or a trade finance fintech, such as PrimeRevenue Inc. (When the buyer’s cash is used to finance suppliers, the practice is called dynamic discounting, which is functionally the same as SCF.)
In its current incarnation, SCF leverages the buyer’s credit-worthiness to improve the supplier’s cash flow.
details in the second echelon. Nor are larger financiers necessarily capable of assessing the solvency and performance of Tier 2 firms, which are often SMEs felt to be riskier. In the simplified synthetic example hereafter, an established OEM with an Aaa rating issues a large order to SCF ON THE BLOCKCHAIN Company A. Then an OEM-partnered In its current incarnation, SCF bank offers $10 million of working leverages the buyer’s credit-worthiness capital to Baa-rated Supplier A. to improve the supplier’s cash flow. The financing is laid out as a smart But what if the buyer’s rating is strong contract on the blockchain, with enough to finance the supplier’s unambiguous triggering conditions supplier and possibly beyond? Can (e.g., verified shipment or receipt SCF equalize the cost pressure over the of goods), payment methods, timebuyer’s entire upstream supply chain? bound discount rates, etc. For instance, Supplier A may wait to receive full FIGURE 1 payment 60 days OEM Tier 1 Tier 2 Tier 3 following the receipt of goods. OEM issues to $10 smart contract Supplier But it may elect on blockchain... million A to receive up to $10 million at a discount of one basis point for each Supplier to $2 A issues day it advances million Supplier smaller B to payment. contract... Supplier C To this point, $500k Supplier B specifying the issues two contracts... buyer’s payment to obligation as a $200k Supplier D smart contract on the blockchain doesn’t offer much Extended buyer-backed financing incremental benefit other than a would require the financier to finance possibly higher degree of automation the buyer’s Tier 2 suppliers, Tier 3 over a standard SCF system. Things suppliers and so on. Such multilateral are more interesting when the contract collaboration is infeasible with existing is chained to pass on a certain fraction supply chain management (SCM) of the financing to Tier 2 suppliers of processes for two reasons: lack of Company A. Figure 1 shows such a visibility and lack of trust. chaining: Company A splits off a $2 While a financier partnered with the million chunk of the OEM’s payment buyer is in a good position to assess obligation to its supplier—Company B. SCF risk associated with the buyer’s Here, the benefits of blockchain supplier (Tier 1), it doesn’t extend to technology are easier to see: Because the supplier’s suppliers. The financier the bank can see both the original isn’t privy to financial or contractual contract (between the OEM and A), as 26
well as the order placed with Company B by Company A, it can verify both authenticity and provenance. If the contract tracks manufacturing or transportation events, the bank can know the state of fulfillment at any given time. In other words, even if the bank is not familiar with Supplier B, it can extend the company a receivables discount against the faith and credit of the originating OEM. Figure 1 also shows that Supplier B may split off smaller chunks of the OEM’s payment obligation to suppliers C and D. Again, the bank can finance C and D with greater assurance because it can guarantee the authenticity of the split contract. Note that, unlike highly customized SCF systems, the design of blockchain is decentralized and collaborative. So adding new participants (such as the Tier 2 and 3 suppliers) is relatively light: It may be as easy as scanning a quick-response code with a cell phone and authenticating participation with a digital signature. The example described is simplified and synthetic. However, the machinery to implement it exists today. Blockchain-based SCF platforms with varying degrees of sophistication in terms of workflow, customizability and linkages with standard IT systems for supply chain management are available. What should be clear is that the visibility and auditability that are hallmarks of blockchain technology allow, for the first time, financial collaboration across supply chain echelons, not just bilaterally. Where blockchain technology can take SCF from here is anybody’s guess. ABOUT THE AUTHOR SANJAY SAIGAL is the head of customer success at SkuChain, a firm offering blockchain technology for collaborative commerce. For more information, visit www.skuchain.com.
SUPPLY & DEMAND CHAIN EXECUTIVE | September 2016 | SDCExec.com
SDC0916_24-26_BlockChains CM2 RG.indd 26
8/31/16 2:09 PM