Blockchain + supply chain finance, solving SME financing problems while reducing risks

China’s blockchain technology-related research and standardized customization are entering a comprehensive stage, and the application scenarios of “blockchain + finance” are expected to see accelerated landing.

Blockchain + supply chain finance, solving SME financing problems while reducing risks

In recent years, the rapid development of supply chain finance, the combination of industry and finance, highlighting the reduction of the overall operating costs of the supply chain, has been a new area of innovation for domestic enterprises and financial institutions to compete. However, domestic supply chain finance is still in the early stage, although there are emerging technologies such as Internet of Things, big data and other emerging technologies and applications, it is far from maturity, supply chain finance is still unable to be separated from credit, and the credit of high-quality core enterprises cannot be conducted to the upstream and downstream of the supply chain, the credit system of small and medium-sized enterprises is not sound, and the problem of difficult financing and expensive financing still exists.

As the core enterprises usually have harsh requirements on the upstream and downstream suppliers and distributors in terms of pricing and billing period, SMEs in the supply chain are often in a tight capital situation and have difficulties in turnover. To solve the problem of difficult circulation of funds for SMEs, risk control is the biggest trouble for Internet supply chain finance platforms. This also leads to the largest scale of accounts receivable category among the four types of financing: accounts receivable category, prepayment category, inventory financing and credit loans.

Pain points of supply chain finance industry

  1. Supply chain information is not transparent

In the traditional supply chain operation, the problem of information silos prevails, and the systems of the chain participants are fragmented, each keeps information, and there is no effective sharing channel and way. For example, the transaction information between core enterprises and their upstream and downstream is only stored in the systems of both parties; the credit information of financial institutions is also only in the hands of financial institutions. As the information of the whole supply chain is not transparent, the participants cannot understand all the information flow and progress of the whole transaction process, which reduces the operation efficiency of the supply chain and increases the difficulty and risk of operation.

For banks and other financial institutions, the opaque information makes them unable to obtain effective data from SMEs, and thus doubt the authenticity of the whole transaction, which makes many real and urgent financing needs be rejected.

  1. Limitation of credit recipients

Due to the existence of information silos, financial institutions only grant credit to upstream and downstream enterprises vertically based on the main credit of the core enterprises for risk control reasons. The diffusion of risk transmission makes the service targets of financial institutions mostly limited to first-tier suppliers and distributors, while the financing needs of SMEs at the far end of the supply chain are difficult to be met.

  1. High risk of default

The existing supply chain management system is weak in restraining the chain enterprises, leaving a large room for operation for malicious false transactions, broken capital flow and other behaviors that may cause default. The final cash settlement between suppliers and buyers, financiers and financial institutions relies too much on the contractual spirit of both parties, especially when multiple transactions or multi-level transactions are involved, the risk of default will increase exponentially.

  1. Difficult to regulate

So far, the electronic degree of supply chain finance is still low, the documents are still mostly in paper form, and the operation also relies on manual work, coupled with the lack of interoperability of information between banks and the lag in obtaining regulatory information, it is easy for unscrupulous enterprises to “exploit loopholes” and repeatedly finance with the same documents or fictitious transaction background and evidence of property rights, for example, in 2012 For example, in 2012, there were false warehouse receipts in steel trade financing in Jiangsu and Zhejiang, and in 2015, there were gold and jewelry processing enterprises in the Pearl River Delta region constructing trade financing speculative arbitrage.

  1. Financing is difficult and expensive

In the current market environment, credit sales are the main settlement method for buyers, and the corresponding accounting period is extended from 30 days to 60 days, 90 days or even 180 days, so there is a large capital gap for suppliers in the upstream of the supply chain. However, the credit of core enterprises cannot be transmitted to the tail end of the supply chain, and it is difficult for enterprises to obtain high-quality loans from banks. And the interest rate of private lending remains high, and the phenomenon of difficult and expensive financing is more serious.

The solution of blockchain in supply chain finance

Last year, the Central Bank issued the Notice on Promoting the Standardized Application of Blockchain Technology and the Rules for Evaluating the Financial Application of Blockchain Technology (hereinafter referred to as “Rules”). As the first blockchain-related specification document issued by the highest authority in China, the release of the Rules shows the great importance attached to blockchain technology at the national level, indicating that China’s blockchain technology-related research and standardized customization are entering a comprehensive promotion stage, and the application scenarios of “blockchain + finance” are expected to see accelerated landing.

At present, China’s Internet + supply chain finance is developing rapidly and playing an increasingly significant role in alleviating the problem of difficult and expensive financing for small and medium-sized enterprises. The combination of blockchain technology and finance industry provides a new technical solution for supply chain finance. Blockchain technology has the characteristics of traceability and non-tamperability. Blockchain technology can transfer the incoming and outgoing data of goods to the relevant system through blockchain to ensure that the transaction information on the supply chain strip is true and reliable.

  1. Transparency of supply chain information

With the support of blockchain technology, the use of Internet, big data, artificial intelligence and other technologies gradually transfer information flow, data flow, logistics and business flow information from offline to online management, showing the trend of online, so that such information can be recorded and traced, and supply chain participants can jointly supervise. The data on the public ledger is visible to all, which can effectively guarantee the access rights and data portability of data subjects and give them more flexible disposal capabilities for their own data.

  1. Credit Transfer

In the traditional financing process, the core enterprise endorsement credit will continue to weaken with the transfer of accounts receivable claims. Blockchain technology plays the role of extending the credit chain, which can map the real accounts receivable claims onto the chain and can realize business actions such as transfer and liquidation based on legal and compliance requirements, and the accounts receivable after the confirmation of the right flows in layers, so that the credit of the core enterprise can be traced to the multi-level suppliers far away from it, and the establishment of trust mechanism and the formation of consensus also brings better liquidity and improves the upstream and downstream enterprises The establishment of trust mechanism and the formation of consensus also brings better liquidity, improves the adhesion of upstream and downstream enterprises to the core enterprise, thus enhancing the competitiveness of the whole supply chain and solving the problem that the credit of the core enterprise is difficult to pass to the end of the supply chain.

  1. Smart contracts control performance risk

The core value of finance is the assets generated through cross-cycle capital allocation, and the smart contract technology of blockchain can carry the assets of such diverse scenarios. Smart contract is an important development direction of blockchain applied to business scenarios. It is a special protocol that encapsulates a number of states with pre-defined rules, triggering execution conditions and situational responses, and is written in the form of code in the blockchain contract layer.

The form of performance based on smart contract can not only ensure the smooth execution of the contract in the absence of third-party supervision, but also eliminate the risk of default that may be brought by manual operation.

  1. Enhancement of regulatory convenience
    The information of supply chain finance is encrypted and traceable, which ensures the authenticity and accuracy of the data; at the same time, the electronicization of paper documents and the application of smart contracts are realized through blockchain, which can effectively obtain regulatory information, analyze and warn the flow of funds, and analyze and verify the authenticity of trade background in time. Therefore, the use of blockchain technology greatly facilitates the supervision and follows the current trend of increasingly strict financial supervision.
  2. Reduce financing cost and improve financing efficiency

The combination of blockchain technology and supply chain finance enables the upstream and downstream SMEs in the chain to conduct trade authenticity examination and risk assessment more efficiently, and at the same time, because the core enterprises are able to pass on credit, the cumbersome verification procedures added in the traditional process due to the crisis of trust can be drastically reduced, and the phenomenon of financial institutions shying and refusing to lend can be improved.

The application of blockchain technology reduces financing cost, improves financing efficiency, and provides a great help to fundamentally solve the problem of difficult and expensive financing for SMEs in the supply chain.

In the future, with the continuous enrichment and practice of blockchain in supply chain finance application scenarios, the whole traditional supply chain finance industry will eventually be revolutionized, and more diversified supply chain finance + blockchain models will emerge in the efforts of financial institutions and various technology platforms or companies to continuously carry out experiments. It will help financial services to move from virtual to real, solve the problem of difficult and expensive financing for SMEs, and truly empower and benefit the industrial economy.

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