At present, China’s economy is undergoing an important period of transformation and upgrading. Many challenges that we are confronting, including “stabilizing growth, promoting reform, adjusting the structure, and benefiting people’s livelihood” are the primary task of current economic and social development, and innovation-driven development is becoming a new engine for China’s economic development. Under the background of "Made with Wisdom", with the development of information technology, the supply chain has developed into a new phase of the smart supply chain that is deeply integrated with the Internet and the Internet of Things. In order to speed up supply chain innovation and application, to stimulate innovation in industrial organization methods, business models, and government governance methods, and to promote supply-side structural reforms, the State Council’s General Office on October 5, 2017 issued the Article (2017) No. 84 General Office Guidance on Actively Prompting Supply Chain Innovation and Application.In the article, there is guidance on “proactively and steadily developing supply chain finance”. Then what is supply chain finance and how can we actively and steadily use new technologies to solve problems in supply chain finance? We start from a typical scenario and analyze the problems and innovative solutions.

Financing difficulties

Figure 1 Typical scenario of supply chain

As shown in Figure 1, this scenario is a commonplace in our world. The FMCG (beers, beverages, dairy products, etc.) in our daily lives are basically sold by manufacturers through dealers across the country to shopping malls, supermarkets, and convenience stores purchased by our consumers. As the production enterprises are in a relatively strong position, the dealers are required to purchase the goods in cash or even in advance, and then production enterprises will supply the goods to the dealers that will supply them to the supermarkets. Since supermarkets take time from the storage of merchandise, sales, reconciliations, after dealers supply goods to supermarkets, it usually takes 3 months to get the balance. In this case, assuming that the dealer has 1 million principals, it will supply goods worth 500,000 yuan to supermarkets every month and the funds will be cut off in the third month. This is a typical “dumbbell shape” supply chain scenario, represent the “two big ones at the ends but the small one in the middle” pattern. The one in the middle is the dealer which is usually SME hard pressed for funds and also is the group that needs strong services from financial institutions. Looking at other industries, similar scenarios currently occur. At present, chain finance is developing vigorously around core enterprises.

As for what the supply chain finance is and what supply chain finance includes, there are many monographs in the market. We will not go into details here. This article will provide an in-depth analysis of how to solve the suppliers’ problem of financing difficulties of core enterprise in a long-term perspective, and how to use blockchains technology to innovatively solve these problems, and whether blockchain technology can bring new breakthroughs in supply chain financing, and whether risk control is more effective.

Figure 2 Multi-tiered suppliers’ financing difficulties in traditional supply chain finance

In Figure 2, the logic of traditional supply chain finance only solves the problem of financing from Tier 1 suppliers. The reasons why Tier 2 and Tier 3...N-tier suppliers’ financing is hard to solve are as follows:

1. Information asymmetry

In the entire supply chain, among all the non-integrated ERP systems between participating companies, some enterprise ERPs cannot be networked. Except for core enterprises and Tier 1 and Tier 2 suppliers, the degree of informatization of SMEs is relatively low, the islands due to the low informatization lead the formation cannot be shared. Financial institutions are difficult to obtain effective credit-supported data; and it is difficult to verify the authenticity of the transaction.

2. credit cannot be delivered

In supply chain finance, the most important thing is to rely on the credit of core enterprises to serve its upstream and downstream SMEs. However, in the multi-tier supplier model, the dealers after the first-tier dealer cannot rely on the credibility of core companies to receive financing, and credit cannot be delivered for SMEs in need of financial services, which causes the difficulty and expensiveness in financing. 

3. Payment settlement cannot be realized automatically according to the agreement

The payment settlement between the suppliers is stipulated in the contract, and there is no way to automate it in a systematic way. This has led financial institutions to the lack of strong guarantee for payment, when participating in supply chain consisting of multi components. 

4. The commercial ticket cannot be paid separately, making the transfer of entire endorsement lack of the scenarios

As shown in Figure 3, due to the manufacturing process, most of the products are composed of multiple parts and involve multiple suppliers. In the process of core company payments, if the core company's payment method is commercial ticket, due to the commercial ticket has the inseparable property and can only be completely transferred through endorsement. After the supplier gets the commercial ticket, it cannot be split and transferred through endorsement. The first-tier supplier has no financing intention to serve other suppliers, and the core enterprise credit cannot be delivered to other customers in the industry chain.

Figure 3 The commercial ticket cannot be split, making it impossible to continue the transferrable payment

Blockchain solution

For the above analysis, for multi-party supply chain finance, the core technologies of blockchain are distributed ledger technology, encrypted ledger structure technology, and smart contract technology, which provide a good solution to the above problems.

1. Distributed ledger technology makes information symmetrical

For enterprises and financial institutions that are dispersed in various supply chain links, use distributed ledger technology to allow multiple participants to join the chain, to share transaction data, and to collect and respond to data, and at the same time, to be able to provide privacy protection and to let data only can be seen by the companies that have permission to see, for example, suppliers are open to financing banks, authorizing financing banks to inquire about their transaction data, receivable and payable data, and these data are based on the accounts payable of core enterprises.

The difference of using blockchain and not using blockchain is shown in Fig. 4, under the traditional system, "trade" and "financing" are two separate links. After companies A and B complete the trade, A takes the trade information and finds bank C for financing. Bank C is concerned that authenticity of information provided by A, which is expensive to verify. (Compared with WeChat, it is equivalent as taking A, B private chat records to Bank C to see, the bank is worried about whether it is true or false). Under the blockchain system, Bank C is in the process of witnessing A and B trading. In this way, A takes trade information to find Bank C for financing. Bank C can check the authenticity of the data from the local witnessed data. (Compared with WeChat, it is equivalent that A, B, and C are having group chat, bank C can verify the local data, which has high efficiency, as long as the legal effect of identity and contract is ensured.)

Figure 4 Industrial changes and characteristics driven by the blockchain 

2. The core company confirms accounts payable and transfers core corporate credits

As shown in Figure 5, through distributed ledger technology, the payables recorded on the blockchain are transferred on the multi-level supplier of payment commitments of the core company to form a circulation in the form of payment commitments and credit assignment of receivables to transfer core corporate credit to SMEs which are in need of financing, and then through intelligent contract technology, after the payment of the core enterprise, the funds are quickly and automatically settled between multiple suppliers, ensuring the payment time agreed by the transaction parties and the liquidation of funds completed on time to guarantee the source of repayment and tangible financing. 

Figure 5 Core Enterprise Credit Transfer Driven by Blockchain

3. Detachable, transferable, financeable, and hold-able payment commitments

Due to the existence of distributed ledgers, the upstream and downstream payables and receivables of the enterprises in the supply chain can share the credits of the core enterprises, making it possible for the payment commitments based on the accounts payable by the core enterprises to be transferred to multi-tier suppliers to solve the problem of triangular debt among enterprises. Simultaneously, any supplier financing on the chain can enjoy the high quality credit of the core enterprise and reduce the financing cost of the entire chain.

4. Smart Contracts Make Risk Controllable

The process of corporate credit transfer on the entire chain is recorded on the chain to form a contract, and the blockchain has irrevocable features. Core enterprise credits do not decay after passing through multiple suppliers. After the core company pays, the funds will automatically liquidated based on the regulations of the smart contract to let capital providers have guarantee on received payments.

Through the above analysis, the value of blockchain for supply chain finance lies in: trust transfer. Based on the trust transfer, the problem of lack of credit of SMEs under traditional financing can be well solved, and the idle bank credit line of high-quality core enterprises can be released and used, so that the credit water of high-quality enterprises can irrigate small and medium-sized enterprises and make the whole chain smoother.

The supply chain finance innovation driven by blockchain will bring greater value and social significance to the company.

1. Reduce the financing costs of the entire industry

The multi-level supplier financing system created through blockchains promotes sharing of all chain information and realizes supply chain financial visualization. It can rely on the credit of core companies to reduce the financing costs of SMEs, increase the efficiency of capital circulation, and indirectly reduce overall production costs, allowing the company's products to be more competitive.

2. Blockchain is an "excavator" for quality assets

Blockchain solves the problem of information asymmetry among enterprises, solves the problem of financing difficulties for SMEs, allows financial institutions to serve SME customers more efficiently, conveniently, and steadily, ensuring that loan funds are based on real transactions. At the same time, relying on the payments of core enterprises, it enables the companies in the entire industry chain to finance, and it was a safe financing. Therefore, the blockchain is a "excavator" of high-quality assets.

3. Penetrating supervision to promote the healthy and stable development of supply chain finance

With the help of blockchain distributed ledger technology, during the entire business process, the supervisory department can set up blockchain nodes to check at any time, without relying on traditional flight inspections, because the blockchain has irrevocable and traceable characteristics. The penetrating supervision of the regulatory authorities is easier to implement, more financial institutions can feel at ease to serve the real economy, blockchain technology strengthens the risk monitoring of supply chain finance, improves the post-event risk management of financial institutions, and ensures the flow of funds to entities. economic. At the same time, blockchain data sharing methods can prevent repeated pledges and empty pledges, and promote the healthy and stable development of supply chain finance.

4. "Industrial Internet + Corporate Finance" to attract capitals into the real economy

In the future, with the development of information technology and Internet of Things technologies, the industry will eventually move to the state of the industrial Internet. Through blockchain, big data, artificial intelligence and other technologies, the real economy will be more efficient, faster, and more securely served by finance. Through the supply chain financial services industry, the value connection of blockchains to discovering scenarios and to serve the scenarios, it ultimately empowers technology to serve the industry to guide more funds to return to entities and to service entities, promoting the transition from manufacturing industry supply chain to industry service supply chain and the manufacturing industry value chain.

Figure. 6 Supply chain + Blockchain Enabling Industries

Today, the country advocates the transition from the virtual to the real. Financial services entities and blockchain distributed ledger technology have the characteristics of unchangeable transactions, and ease of traceability and penetrating supervision, enabling easier supply chain finance from transaction, payment and settlement to financing and reducing trade frictions. Blockchain functions in supply chain finance to deliver trust. The distributed sharing model created by blockchains can attract blockchain nodes including national and local credit information sharing platforms, commercial banks, and supply chain core enterprises in access area

to open and share information, providing efficient and convenient financing channels to upstream and downstream micro and small enterprises in the supply chain. 

To learn about Yinuo Finance, please identify the QR code to get the contact card

(Source: No. 281, November 1, 2017 "New Banking")

(The author is Bobby's co-founder and vice president Zhang Mingyu)