Solving the Problem of Deep-Tier Financing

How Blockchain Solves Deep-Tier Financing Challenges

A solution to the problem of financing long supply chains would boost trade, help SMEs and support post-Covid economic stimulus policies around the world. Jean-Baptiste Gaudemet, SVP Data & Analytics at Kyriba, explains how the combination of IoT technology and tokenisation could revolutionise the provision of financing for the global supply chain.

As we emerge from the Covid pandemic, most national governments are keen to support their small and medium-sized companies (SMEs). A big help would be to solve the problems of late payment and stretched SME balance sheets. These issues pre-date Covid-19 but they have the potential to hamper the much-needed economic recovery post Covid.

The good news is that the world of supply chain finance is about to be revolutionised by the powerful combination of Internet of Things (IoT) technology and innovative decentralized financing platforms.

With an estimated 50 million IoT devices by 2030, the potential already exists to track the movement of goods at each stage in the supply chain. That traceability also offers the opportunity to improve financing along the long supply chains that now characterise so much of global commerce.

Sponsoring a supplier’s credit line and using the invoice as collateral is a well-established way for big companies to help their immediate suppliers. But that reverse factoring approach does not work for a long supply chain, working just-in-time and with the various elements along the entire chain very interdependent. As a result, many SMEs remain highly dependent on traditional sources of funding, and their involvement in long supply chains weakens the entire chain.

What is needed is a financing platform that works right along the supply chain, including all the SMEs that make up that chain, with the end-buyer providing the ultimate guarantee of payment for all. This is currently possible but it is a legal nightmare, involving a mass of separate contracts and making it a non-starter in practice. We need to leverage the power of decentralized finance technology to unlock deep-tier finance.

The impact of blockchain

Blockchain can change all this, by recording the payment guarantee of the end-buyer in the form of a non-fungible token (NFT). That NFT can be passed along the chain, verified at each stage, and allowing the various companies along the chain to prove that they will indeed be paid.

To work, such a solution requires three key elements:

• A solution to the technical challenge of creating a working NFT.
• A financial mechanism to incentivise suppliers at each stage of the supply chain to pass the NFT on to their own suppliers. That could take the form of a spread coded into the NFT smart contract, for example.
• Effective KYC for all participants at each stage along the chain.

The successful introduction of NFTs throughout the supply chain would give payments and cash management companies such as Kyriba the opportunity to extend support from the biggest companies down to the level of SMEs, where the benefits of that support are most needed and would be most apparent.

Perhaps this sounds like fantasy. But the good news is that there are start-ups working on each aspect of this solution. Analysts can already discern elements of this new approach in China, a country which is also leading the pack on the development of a Central Bank Digital Currency (CBDC).

Tapping new sources of finance

And it does not stop there. The introduction of tokenisation allows companies to tap new sources of financing, investors who would see these tokens as a tradeable and therefore investable asset class. At that point, supply chain finance becomes interesting to the huge pool of institutional investors, such as pension funds and insurance companies, looking for the spread offered by this alternative asset class. The potential – for both companies and investors – is huge.

The development of CBDCs will make the management of the invoice token even more efficient. The payment in CBDC can be self-executed on chain by the invoice smart contract. It means reconciliation between the asset custody ledger and the cash ledger is not necessary anymore. This will be a revolution in financial technology that will dramatically reduce the cost and accelerate the payment and settlement processing.

Conclusion

The current problems in the electronic chip supply chain show how important it is for the global economy to find a workable solution to the problems of long-chain payment. Deep-tier finance built around NFTs and funded by institutional investors could well be the solution. In the current context, buyers must also work to secure the loyalty of their supply chain. One way for them to do that is by offering differentiating services such as supply chain finance and deep-tier finance at attractive funding rates. The world of supply chain finance is changing fast. And the impact of those changes has scarcely begun to be felt.

Kyriba is a global leader in cloud treasury and finance solutions – for more information visit www.kyriba.com