In today’s globalised world, large corporate buyers know their success relies not just on their direct suppliers that produce the goods they need, but also the smaller companies further down the chain that make components that are essential to the finished product.
If the firm that provides a specific electronic component in a mobile phone goes out of business, or the packaging company that boxes the product goes bankrupt, the ramifications can echo throughout the supply chain – causing delays and pushing up costs. Increasingly, the health of this supplier ‘ecosystem’ is a concern for large companies.
This is where the latest innovations in supply chain finance (SCF) are starting to extend traditional reverse factoring beyond the first tier of suppliers.
As Sriram Muthukrishnan, head of global transaction services, trade product management at DBS in Singapore tells SCF Briefing, often first-tier suppliers don’t even require financing anymore.
“When we approach anchor companies and offer their supply chain ecosystem a standard financing solution, we often find that their largest tier-1 suppliers don’t need it. They either say they have their working capital needs sorted out or are cash-rich – it is the next-tier of suppliers that need financing, the smaller outfits embedded deeper in the supply chain,” he says.
This next tier is often composed of much smaller companies that are deemed higher risk by lenders and struggle with access to, and the cost of, financing.
Asian Development Bank found that 45 per cent of SMEs globally face regular rejection by financial institutions for trade finance, which contributes to a global financing gap of $1.5 trillion, according to its 2019 report.
“We needed a financing solution where we could leverage an ‘ecosystem’ approach. Most SMEs often lack scale and are not top-tier suppliers or brands, resulting in limited trade financing options. So the key question is how do we create an ecosystem ‘halo effect’ to enable SMEs to receive the financing they need?” Muthukrishnan asks.
This is where blockchain technology comes in to help, he says.
In August, DBS trialled its first multi-tier financing facility on a logistics blockchain platform called Rong-E Lian, designed to provide small and medium-sized companies in China quicker with access to trade finance.
The solution was developed with an undisclosed Chinese logistics company and offered finance to 1,000 suppliers within the company’s supply chain ‘ecosystem’. It was officially launched in September.
Using DBS’s own Application Programming Interface (API) supplier onboarding tool combined with blockchain technology, Muthukrishnan explains how the bank was able to onboard and check credentials of both direct suppliers and then their subsequent network of suppliers too.
The transparency offered by blockchain digital ledger technology – where any information inputted into the shared ledger cannot be changed – gives the bank and the main or ‘anchor’ buyer a clear view of who is in the supply chain and whether a request for financing from a deeper tier supplier is valid.
“Whether it is a packer, a logistics firm, a manufacturer – we can track their contribution to the ecosystem using blockchain and leverage on the fact that, eventually, they are helping to fulfil a larger order placed by a large anchor [buyer]. This is the thought-process that underpins multi-tier financing,” he says.
Standard Chartered is another bank exploring deep-tier financing solutions to help their clients support their entire supplier ecosystem.
“For anchor buyers, deep-tier financing offers them visibility further into their supply chains, which allows them to better verify the provenance of the goods they buy, identify potential issues earlier in the chain and manage procurement more effectively,” Xie Wen, head of commercial banking China, at Standard Chartered tells SCF Briefing.
“It also allows them to extend support to their suppliers’ suppliers, thereby improving the overall health of their supply chains,” she adds.
In September, Standard Chartered and Chinese tech firm Linklogis announced the completion of its first deep-tier SCF transaction for telecoms firm Digital Guangdong and its upstream suppliers.
Digital Guangdong – a joint venture between Tencent, China Unicom, China Telecom and China Mobile, has developed more than 700 digital government services.
By using Linklogis’ WeQChain blockchain platform, Digital Guangdong should have greater transparency on its network of suppliers, beyond its direct suppliers.
“We realized that the traditional SCF programme only available to tier 1 suppliers and the further upstream tier suppliers are not able to access to SCF on his indirect trade relationship with the large buyer clients,” James Li, CEO of Linklogis tells SCF Briefing.
“From [the] buyer perspective, working capital is not fully optimized across the entire supply chain across multi-tier suppliers,” he explains, providing a detailed explanation of how the technology works.
He explains how a larger buyer active on the Linklogis platform can have its confirmed invoices or accounts payables digitized on the chain as an ‘e-voucher’. This can be financed by a tier 1 supplier in a similar way to traditional reverse factoring, he says.
That tier 1 supplier can then divide the ‘e-voucher’ and transfer a portion of it to its tier 2 suppliers. This e-voucher can then be split again and transferred further upstream.
Each holder of an e-voucher can present it the platform and be pre-paid based on its value. “In effect, the bank is purchasing the Tier 1 supplier’s account receivable – represented by the e-voucher – from these deep-tier suppliers,” adds Wen.
“[The platform] allows all participants on the blockchain – the anchors, suppliers, financing providers – real-time visibility into who owns which e-vouchers within the programme. This allows us to ensure there is no duplicate finance against the same e-vouchers and minimises reconciliation effort required between the different parties,” she explains.
Interest in such platforms is likely to grow as understanding around their structure deepens. “We do see strong demand from the buyer perspective to implement this deep-tier solution,” notes Li. “However, this new approach is still new in the market [and] requires education,” he adds.
While Asia saw a flurry of deep-tier financing solutions in September, there are companies elsewhere taking their first steps into this emerging area of financing.
In October, fintech Tradeshift said an order placed by a local retailer, Nordic Store, with Ikea Iceland had been settled on its platform using ‘programmable digital cash’ from Monerium.
Monerium was licensed by the Financial Supervisory Authority of Iceland earlier this year, meaning the start-up is the first to be allowed by regulators to make e-money payments on blockchain systems within the European Economic Area.
While Tradeshift’s transaction is not in support of deep-tier suppliers, it does involve ‘digitising’ invoices or creating ‘smart’ invoices, which the fintech says it will build upon to eventually offer finance solutions to suppliers deeper into a supply chain.
“We are in the early phases, but we have demonstrated how we can tokenize an invoice and settle it with real money on blockchain,” Mads Stolberg-Larsen, an economist and blockchain specialist at Tradeshift, tells SCF Briefing.
“That way we have shown that invoices and other documents on Tradeshift can be converted to tradeable digital assets on blockchain. This provides a foundation for our continued work on a solution we call ‘ecosystem finance’,” he explains.
Interest is clearly growing, and it’s likely more SCF providers will trial their own blockchain-powered platforms to provide deep-tier or ecosystem finance.
“We are focused on driving adoption of this capability in China and elsewhere,” says Wen. “We are also exploring opportunities with Linklogis to leverage their data and analytics capabilities to offer credit directly to the deep-tier of suppliers,” she adds.
“The concept of multi-tier financing has relevance across all geographies and industries, wherever there’s a long supply chain,” says Muthukrishnan.
“We have a lot of interest from western automotive players who have supply chains in Asia. There are discussions in China and India. There is interest from big global names in FMCG, TMT and logistics. There are a number of industries where this is gaining ground,” he says.
The trend towards developing deep-tier financing partly reflects a shift in the mentality of some large buyers. Rather than trying to squeeze suppliers and boost their days payable outstanding (DPO) ratios, some buyers are recognising the need to look after their suppliers and the wider network so everyone can stay in business.
Blockchain technology coupled with supply chain finance techniques could be one way to meet this need.