21 August 2017
Carlo R.W. De Meijer

Blockchain Observations

Carlo R.W. De Meijer - MIFSA

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Blockchain and Supply Chain Finance: the missing link!

05 May 2017  |  14275 views  |  0

Whereas the focus on the use of blockchain long time has been on payments and securities, an important but still undervalued use case has been supply chain finance. But that is changing. The complexity and scale of existing supply chain finance solutions has posed major challenges in ensuring adequate funding and efficient operations.  According to some blockchain technology has the potential to be a game-changer for supply-chain finance.  Let’s have a look.

 

Present state

Supply chain finance (SCF) is a generic term for a wide variety of financing instruments, used to finance various parties in a supply chain. SCF refers to the use of short-term credit to balance working capital between  a buyer and a seller, thus minimising aggregate supply chain cost. Businesses can use supply chain financing to build stronger relationships with suppliers, decrease currency risk and ultimately improve liquidity.

Financial institutions offer supply chain financing solutions aimed at improving the purchaser’s working capital, and the supplier’s liquidity, by providing an efficient payables platform to streamline the payment process. Compared to the “old-fashioned” Letter of Credit, SCF now also encompasses new trade finance instruments including factoring, reverse factoring, payables financing, and dynamic discounting. Reverse factoring is the most popular and most widely used supply chain finance instrument. In reverse factoring, receivables are sold to a bank at a discount as soon as they are approved by the buyer. The bank then commits to pay the company's invoices to the suppliers.

It is important to understand that supply chains are complex by nature; various parties are involved from raw goods supplier, producer and distributor all the way up to the consumer. This has posed major challenges in ensuring adequate funding and efficient operations. 


Blockchain and supply chain finance

The question is: what can blockchain main for supply chain finance and how could it be applied?

A blockchain-based supply chain finance solution more specific via so-called smart contracts will essentially enable all parties in a supply chain finance solution to act on a single shared ledger. A supplier and manufacturer, along with every other participant, will solely update their parts of the transaction, enabling efficiency and an “unprecedented” level of trust and transparency on a ledger record that is immutable.

 “If you talk to supply chain experts, their three primary areas of pain are visibility, process optimization, and demand management. Blockchain provides a system of trusted records that addresses all three.” Brigid McDermott, vice president, Blockchain Business Development & Ecosystem, at IBM

Blockchain technology can offer great potential for both corporates and banks in terms of increased control, speed and reliability of their supply chain and at a fraction of the cost of their current infrastructure. Payments made via this digital system can be monitored by both parties, meaning that suppliers are no longer at a disadvantaged positon in the buying process while they wait for processing. Blockchain will speed up the process, giving the two companies more control, and in the long-term would ultimately create more robust supply chains.

Because the bank can see both the original contract as well as the order placed with “Company B by Company A”, it can verify both authenticity and provenance. Further, if the contract tracks manufacturing or transportation events, the bank can also know the state of fulfilment at any given time. What should be quite clear is that the visibility and auditability that are main characteristics of blockchain technology allow, financial collaboration across supply chain echelons, not just bilaterally.

The time required from initiation to payment can therefore be dramatically reduced. In addition to the reduced transaction time, other benefits for importers and exporters include reduced bank fees (due to less manual activity on the part of the banks), reduced time for loan approval, and reduced risk of fraud.  This way of financing a supply chain is radically cheaper and more efficient than the current way of doing business.  

 

Blockchain SCF projects

Since early this year the number of blockchain projects to improve supply chain finance is growing firmly. Especially IBM is very active in this area and partnered with companies in China and India to work on new blockchain-based solutions. IBM also teamed with Danish logistic and transport company Maersk Line, to create a new solution to digitize the global, cross-border supply chain using blockchain technology. Start-ups are at the same time popping up to help bridge the gap to this new technology, such as blockchain-based financial operating network Fluent, which aims to streamline supply chain finance.

“Blockchains built into supply chains can offer trust and accountability, as well as compliance with government regulations and internal rules and processes, resulting in reductions in costs and time delays, improved quality, and reduced risks,” Arvind Krishna, IBM Research Senior Vice President and Director. Yijian Blockchain Technology Application System

  • Yijian Blockchain Technology Application System

IBM and China supply chain manager Sichuan Hejia recently announced the launch of a blockchain-based, supply chain financial services platform. This platform is designed to streamline flows among buyers, sellers and financiers in the  pharmaceuticals space and help improve efficiency, transparency and operation of supply chain finance. The Yijian Blockchain Technology Application System, a permissioned blockchain platform that uses Hyperledger Fabric, seeks to eliminate some of the financing problems faced by the country's pharmaceutical retailers.

The platform is designed to bring greater transparency into supply chain networks by tracking the flow of drugs, encrypting trading records and offering an easier means of authenticating transactions. In turn, this may help lower the credit risk profiled by financing institutions, which should allow the payment period to be shortened. The end goal is to reduce the time small retailers must wait to be paid after delivering medicine to hospitals.

“Overall the use case offers an ideal example of how the company's enterprise blockchain platform can smooth multi-party transaction processes”, Ramesh Gopinath, VP of Blockchain Solutions, IBM.

Initially, the Yijian system will be implemented on a test basis by one pharmaceutical retailer, one hospital and one bank. In July, Hejia plans to expand the platform to include multiple pharmaceutical retailers, hospitals and banks. In the future, the platform will expand to include more industries to provide participating companies and financial institutions with transparent and efficient financing services built on blockchain-based innovation.

  • Mahindra common platform

IBM and Indian multinational conglomerate and lender Mahindra announced a partnership in November last year toward developing blockchain applications for better, more efficient supply chain financing among India’s SMEs. According to IBM this will be the first supply chain finance blockchain-enabled project in India. Aim is to create a common platform for supply chain finance for  Mahindra Finance’s supplier to manufacturer transactions, allowing all parties to view transactions in real time, driving trust and transparency through the supply chain.

  • Chained Finance

China-based electronic firm Dianrong and online marketplace lender  FnConn (a Foxconn subsidiary)have united to launch Chained Finance in March, which they are claiming is the first-ever blockchain platform for supply chain finance. In February this year  Foxconn demonstrated a blockchain prototype  of Chained Finance which secured funding for small and medium enterprises (SMEs) in China that were otherwise unable to secure needed capital. 

This platform that leverages blockchain technology using Hyperledger is aimed to meet the “hugely” underserved needs of supply chain finance in China’s SME market and provide better financing possibilities for small and medium enterprises (SMEs) in the country.  The spin-off project is designed to connect non-bank lenders with suppliers who don't typically deal directly with financiers. Both companies  expects that Chained Finance could help supply chain finance operators potentially triple the number of SME supply chain operators with access to funding in China. 

Chained Finance is initially targeting three specific and major industries in electronics, auto manufacturing and garments.  What the three industries have in common, is a relatively shallow pool of suppliers, which is necessary to accommodate the blockchain platform’s early stage of development.

“Chained Finance creates a unique ecosystem that will provide supply chains with easier access to funding at competitive rates. In return, supply chain operators will gain greater visibility if their suppliers and the many layers of finance embedded in the process”  Soul Htite, Founder and CEO of Dianrong.

Savings could eventually result from cutting out commercial banks and other third-party money-suppliers. If successful, the savings could “trickle down to the entire supply chain”. In this scenario, smaller supply chain suppliers will gain capital while large multinational manufacturers see transparency and enhanced visibility.

"By using the Chained Finance platform, every payment, every supply chain transaction, can be more transparent, manageable and easily authenticated"  "Chained Finance will provide timely, efficient support to far more suppliers of all sizes. It will also help ensure the timely delivery of products to end customers and improve efficiencies across the entire supply chain." "We think all the supply chain, not just supply chain finance, can be handled by blockchain, [which] will make the whole business transaction easier to validate and enhance the efficiency of the whole ecosystem." Jack Lee, Executive Director and CEO of FnConn. 
 

  • IBM – Maersk global cross border blockchain-based supply chain solution

IBM announced that it is teaming with logistic and transport company Maersk Line, to create a new solution to digitize the global, cross-border supply chain using blockchain technology. IBM and Maersk worked with a variety of partners, including government authorities, trading partners and logistics firms, to pilot the solution.

“As a global integrator of container logistics with the ambition to digitize global trade, we are excited about this cooperation and its potential to bring substantial efficiency and productivity gains to global supply chains, while decreasing fraud and increasing security,” Ibrahim Gokcen, chief digital officer, Maersk.

The solution, which is based on the Hyperledger Fabric, will digitize the supply chain process to create end-to-end transparency and secure collaboration capabilities. The IBM/Maersk collaboration, which will be offered as a service, is focused on reducing or eliminating fraud and errors in the transit and shipping of products, as well as minimizing time spent managing transactions among transactions among shippers, freight forwarders, ocean carriers, ports and customs authorities.

This blockchain solution provides all participants in the supply chain with end to end visibility, with each group given only the level of permission needed to achieve the objective. Participants can view the progress of goods online, see the status of customs documents, and view bills of lading and other materials. This should enable cheaper supply chain finance.

By providing all parties with a single shared view of data, the solution hopes to reduce complexity and make data sharing secure, accurate and efficient. In addition, by streamlining document handling, the solution should reduce cost, ”since document processing and administration typically represent up to 20% of the total cost of physical transportation”. Aim is not only reduce the cost of goods for consumers, but also make global trade more accessible to a much larger number of players from both emerging and developed countries.

  • Fluent Trade Asset Marketplace

Fintech company Fluent,  last year set-up The Fluent Trade Asset Marketplace. This Marketplace, a blockchain-based end-to-end open financial network and payment platform, provides access to a global network of businesses, banks, and liquidity providers who power working capital solutions built on the Fluent Network. The platform is designed to streamline and automate settlement, reduce fraud risk, and break down costly data silo’s. “The first-of-its-kind Marketplace” leverages distributed ledger technology to drive security, automation, and efficiency in origination, distribution, tracking, settlement, and reconciliation of trade assets including receivables and approved payables. Fluent’s platform prevents  double financing, perfecting interest in receivables across different markets, and automating these processes.

Fluent has announced a partnership with Euler Hermes, the global leader in trade credit insurance. Fluent plans to utilize the Single Invoice Cover, a “first of its kind” API-based, real-time credit insurance tool powered by Euler Hermes. The Single Invoice Cover was created to reinforce value propositions to supply chain finance platforms. It allows a user to instantly purchase credit insurance against the non-payment of a given invoice within the Fluent Trade Asset Marketplace.


Blockchain: the missing link

Using blockchain may provide a simple system of secure record keeping that allows the bank redeeming CFS “to ensure that the CFS presented by the holders has been used to finance appropriate supply chain smart contracts”. At the same time suppliers using the blockchain system may retain the privacy that is need in their financial transactions with their sub-suppliers.

There are still challenges to be dealt with, too, such as the need to implement paperless trade, issues of data privacy, and how to get all members of a supply chain to participate. If global supply chains are to gain the full benefit of this technology for managing payments and related data, all parties that play a role in global trade must be involved!

By providing this missing piece of the information and supply chain management puzzle, blockchain may become the missing link!

TagsBlockchainPost-trade & ops

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