Digitalization and New Opportunity of Supply Chain Finance Through B2B FinTech

1. Past and Present of Supply Chain Finance

Concept of Supply Chain Finance

Supply chain finance is a set of solutions that optimize cash flow to promptly provide suppliers with the necessary funds for the process of producing and supplying goods. This form of corporate financing has long been a financial instrument for SMEs, encompassing accounts receivable discount, supply chain finance, and trade finance.

Basic structure of traditional supply chain finance

The Advent of Online Platform-based Supply Chain Finance

Online platform-based supply chain finance model came out to alleviate the limitations of traditional supply chain programs. It provides new financing to expand funding opportunities for SMEs by offering transparent access to all transactions online and allowing investors to invest in an online platform.

2. Future of Digital Supply Chain Finance

Disruptive Technology of Supply Chain Finance

As you’ve seen from examples of FinTech, the differentiated technology elements that can provide new experiences for SMEs will become enablers undoubtedly bringing new changes to the market continuously. Let’s look into innovative technologies that will lead to change in supply chain finance to predict the future of the digital market.

A. Future technologies to create ‘bankless’ finance: Blockchain, and Internet of Thing
-  Eliminate the inherent risks of supply chain finance through information transparency
-  Implement a new standardized global payment environment
-  Increased opportunities for new investment and product development due to information visibility and improved reliability

B. Key technologies for competitive differentiation: analytics and mobility
-   Base for providing convenience specialized in online platforms and cost efficiency
-   Provide an environment to collaborate and communicate between suppliers and buyers anytime anywhere
-   Open up customized investment opportunities by discovering hidden customer values

C. Element technologies opening an era of digital supply chain finance
-   Basic technology for offering E-to-E service
-   Electronic documentation and automated data linkage
-   Supply chain process management through system

Blockchain-Enabled Accounts Receivable Discount Automation Model

Automated Loan by Smart Contracts

Blockchain smart contracts that complete transactions without additional online/offline confirmation and crosscheck are applied to completely replace transactions guarantee function of trade documents (invoices and BL), and the loan is automatically executed for the SME when the pre-contract conditions recorded in the Blockchain are established.

Major Transaction Flows
-  Multiparty agreements on trade transactions : delivery of goods through the platform, agreements on terms of accounts receivable discount between suppliers and buyers (assuming buyer’s direct investment model), and digital wallet generation
-  Movement of goods : linkage between Blockchain and logistics information (QR code attached to the goods) and real-time information of trade parties
-  Automatic loan : when the pre-agreed conditions are satisfied, the supplier automatically gets funding through Wallet without going through payments agency or financial institution

Value for Customers
-  Secure global trading security and settlement stability : participants, including a wide range of suppliers, buyers(MFR), and distributors, enable stable and transparent processing of complex transitions, involving the transfer of global goods and documents
-  Cost reduction by eliminating intermediaries : implementation of remittance system between Digital Wallets by linking real-time logistics information using IoT to peer-to-peer distributed ledger

P2P Trading Model with Securitization of Global Accounts Receivables

Developing New Products of Global Accounts Receivables Using Blockchain
Innovation of Blockchain overcomes limits of asset securitization of global accounts receivables—difficulties in distinguishing authenticity of transactions, tracking individual transactions in a transparent and precise manner, and global security—and enhances opportunities to offer products meeting customers’ needs.

Major Transaction Flows
-   Invoice Registration : suppliers select loan size, discount rate, and period
-  Blockchain-based Securitization : According to risk calculation based on credit risk, period, and so on, individual contracts are combined to form accounts receivables class, and pooling and stripping are used for the securitization. Information about individual contracts and class configuration are recorded sequentially in blockchain, and an environment where risk tracking is enabled is implemented.
-  Global Institutional Investors & Individual Investors Investments : global institutional investors organize short-term syndication fund to invest in securities with large trading unit, and individual investors can invest in the small amount of securities.

Value for Customers
-   Commodification of Receivables and Invoice Investments : absorbing individual investors through the small amount of securities, meeting global investors’ needs by forming syndication loan, and overcoming investment constraints due to short-term investment and high risk of accounts receivables

3. Influence and Application Plan by Financial Sector

Bank

Possibility to face new competitive environment from market entry of FinTech companies
-   In the short run, impact of entrants such as FinTech companies is marginal because of banks’ superiority in risk management capabilities, infrastructure, and existing corporate clients.
-   In the long term, competitive threats stemming from the growth of alternative funding markets and new revenue opportunities will coexist. It is highly likely that banks will have different results depending on their digital capabilities.

Require direct promotion of platform businesses
Recently, Woori Bank, Star Bank, Koscom, and POSCO Daewoo have announced plans to jointly participate in supply chain finance platform. In the light of the experience of existing business, enterprise customers, and risk management capabilities, securing the digital platform capabilities and promoting the business directly will ensure strengthening of leadership and increase in profit as the business grows.

Insurance & Securities

Minor short-term effect due to differences in industry attributes
-   Attributes of the main financial services of securities and insurance are fundamentally different from those of supply chain finance, which are ‘corporate financial services collateralized’ so they won’t hardly pose competitive threats.

Active exploration of business opportunities in response to growth and changes in new markets is required
-   In the long view, changes in all financial sectors resulting from FinTech are inevitable.
-   It is necessary to pay attention to the trend of increasing interest and investment regarding supply chain finance platform from global insurance companies and IB.
-   Strategies to use Blockchain as a differentiator or means of long-term lock-in are spreading by adding various financial services based on enterprise customers secured through the platform.
-   Pro-active strategies—platform-based monetization opportunities and securing long-term corporate clients—are needed.

Generate revenue by participating in ecosystem and consider expanding business loans through the platform

Insurance or securities firms lack customer base or experience in business loans compared to banks. They can create new revenue by participating in supply chain finance platform ecosystem based on business specialization area. As platform operators, they are able to leverage insurance and securities capabilities to perform a variety of strategies for expanding corporate financing opportunities and investors. In addition, it is also necessary to actively examine measures to enter the supply chain finance platform business directly in response to changes in the corporate loan regulation of securities and insurance companies.

Ways to Generate Profit Through Insurance & Securities Firms’ Participation in Blockchain Ecosystem(Ex.)

Considering the evolution of supply chain finance—expansion of customer base and diversification of investment products—strengthening the capacity of the open ecosystem-based block chain platform to meet a wide range of needs of investors and SMEs and expand opportunities is likely to become a major trend. The roles of insurance & securities and effects of their participation in the model presented below are as follows.

Insurance Firm
-   Role : provide insurance for enhancing credit of SMEs
-   Background : concerns about default risk of SMEs due to banks’ loan restriction on SMEs that are not investable

Securities Firm
-   Role : expand platform customer base to individual investors through development of securitization products
-   Background : the need for small-sum transaction products for individual investors

Means of entering overseas financial markets in addition to securing new revenue sources
-   Supply chain finance is an ‘anchor’ type business that can absorb long-term customers of large companies and SMEs.
-   Opportunity to enter the market by providing services of companies with global supplier network.

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