Blockchain and the opportunities to accelerate SCF development

Currently, blockchain is proving to be more than just a hype. Blockchain applications are moving from pure cryptocurrency towards applications in many other contexts. At the same time, Supply Chain Finance (SCF) is moving from a one-dimensional focus on Reverse Factoring (RF) towards other instruments. Blockchain has the potential to improve supply chain collaboration, to speed up the shift in the usage of SCF instruments and to include different types of players in the supply chain that are often left out, like SMEs.

The blockchain promise: transparency, trust, safety and decentralisation

Transparency, trust, safety and decentralisation are the most used keywords when explaining the possibilities of blockchain. Blockchain is a distributed system without a single company having control of it. This decentralised system, therefore, has no ‘one single point of failure’ and should be safe and less vulnerable, for example for hacking or data corruption. The system can eliminate problems with disclosure and accountability between companies whose interests are not necessarily aligned, thereby providing a solution for limited information sharing in the supply chain because of low trust. Data that is mutually important can be updated in real-time giving transparency to managers and reducing the need for error-prone reconciliation with each other’s internal records, for example when it comes to orders and invoices.

Supply chain effects: collaboration and key KPIs

Increased transparency, trust, safety and decentralisation, created by blockchain, can have clear supply chain effects. With blockchain, every member of a supply chain can get more visibility about flows of goods, cash, and information. This can lead to faster and more efficient sending, approval and payment of orders and invoices and the tracing of errors. In a broader context, blockchain can change the structure and the relationships between companies within the supply chain. The technology can reduce the need for intermediaries such as financial service providers but also logistics service providers, for example, expeditors who arrange transportation for other companies.

Less manual intervention in order-to-cash and purchase-to-pay processes in combination with fewer intermediaries will reduce operational expenses for the other supply chain parties. Because of the possibilities for ‘selective’ transparency, companies can share more easily the mutually beneficial information. This reduces information asymmetry in typical buyer-supplier relationships and allows for better collaboration. Research on 11 use-cases shows how blockchain influences key supply chain KPI’s like cost (by reduction of paperwork for orders and invoices), speed (reduced interaction needed for delivery of goods), flexibility (easier to monitor performance and adapt it to customer’s wishes) and dependability (easier to verify quality of product).

Supply chain finance effects: enabling both post-and pre-shipment SCF

Improved supply chain collaboration, due to safer and easier sharing of mutually beneficial information, is an important catalyst for SCF. This enables more efficient processing, reduced paperwork and, therefore, better order-to-cash and purchase-to-pay processes. Post-shipment SCF instruments, in particular Reverse Factoring, are still by far the most popular. For RF, the trigger point is an approved invoice. Blockchain can increase the speed at which the invoice is approved with fully digital and signed order, delivery and payment documents, thereby increasing the potential win in RF. The onboarding of suppliers onto SCF platforms can be complex and costly, which is why only suppliers representing large spend are usually invited and the SMEs in the ‘long tail’ supplier base are left out. One example of how blockchain can cut onboarding cost is by reducing the need for extra KYC checks. Right now, there is often a duplication of KYC checks, since RF is done with the bank of the buyer, which is not necessarily the same as the bank of the supplier. By sharing checks and registering them on a blockchain, banks will no longer have to do a second check. This allows for a reduction in onboarding costs and the inclusion of more SMEs in RF.

Besides the invoice, blockchain can also play an important role in the processing of other supply chain documents. Consider, for example, the storing and sharing of the order information, the bill of lading, CMR waybills and customs information. A bank can more easily provide financing before invoice approval when there is better information and more certainty about outcomes. Transparency in sharing these documents provided by the usage of blockchain technology allows a bank to make a better estimation of the supply chain risks. Therefore, blockchain can be a major accelerator for the usage of pre-shipment SCF instruments like PO Financing and inventory finance.

This editorial was first published in our B2B Fintech: Payments, Supply Chain Finance & E-invoicing Guide 2018. The Guide gathers leading solution providers, consultants, associations, banks and corporates that share their latest insights, technologies and best practices in B2B payments, real-time fraud prevention, instant payments business opportunities, and supply chain sustainability.

About Christiaan de Goeij

Christiaan de Goeij is a researcher at Windesheim University of Applied Sciences and Politecnico di Milano. He is also the project manager of ‘SCF for SMEs’, which recently won the RAAK-audience award for the best applied research project in the Netherlands.

About Michiel Steeman

Michiel Steeman is the inaugural holder of the Supply Chain Finance professorship at Windesheim University of Applied Sciences, and executive director of the SCF Community. His job experience includes various senior roles for Deutsche, NIB Capital, NMB-Heller and ING.

About Supply Chain Finance Community

The Supply Chain Finance Community is an independent global community promoting and accelerating the understanding, development and implementation of SCF. It connects knowledge institutions to the industry by supporting research projects and endorsing SCF initiatives and events like the SCF Forum, the Global Student Challenge and the SCF Academy.