In a traditional supply chain finance model, cash flow is optimized by allowing businesses to lengthen payment terms to suppliers while providing the option to suppliers to get paid early. It’s a spider web of contracts, invoices and payments sits between the buyer, the supplier and the funder. Each of these entities is more or less responsible for creating, sharing and maintaining their own financial records. There are different data portals, and transactions and records can get out of sync.
The emerging technology behind cryptocurrency might be able to untangle that web of data and create a streamlined system that would centralize the data. Cryptocurrencies are digital currencies that use encryption, both to generate funds and verify transactions. Perhaps the most well-known cryptocurrency is bitcoin, but there are hundreds of different kinds.
The focal point of the technology behind these cryptocurrencies is a public ledger that contains a history of all transactions. No one entity owns that ledger, and several parties verify it, which makes it nearly impossible to tamper with and thus trusted.
Apply the idea of a shared public ledger to supply chain finance, and it becomes a verifiable, incorruptible centralized data source. Buyers, suppliers and funders can all access this source to retrieve information about contracts and transactions. This could help suppliers get paid faster and funders transact more securely and easier with buyers.
This is where the value for supply chain finance lies–not with the cryptocurrency itself but with the foundational technology. The technology itself is called the blockchain, and if implemented with supply chain finance, it could increase efficiency and decrease discrepancies. At the highest level, the technology generates information about transactions and stores them in a block, which is a cloud based data structure linked to other blocks in the chain, hence the name blockchain.
Right now, using this technology for supply chain finance is in its nascent stages; no one organization has adopted blockchain as the way to handle all of its transactions, but the expectation is that it might not be too far down the road.
One of the most interesting aspects of this technology is smart contracts. Basically, any agreement that can be represented in code can become a smart contract. Not only are these contracts verifiable on the blockchain, but they can be self-activating and self-enforceable. The blockchain would also store every version of a contract. No more digging through email to find a previous version of a contract that was emailed weeks ago.
To directly apply it to supply chain finance, think about a simple transaction. A buyer and a supplier have agreed upon a price for a set of goods to be delivered on a certain day. If a smart contract is set up, as soon as those goods arrive in the set location, the contract would transfer the ownership of the goods to the buyer and would transfer the agreed upon funds to the supplier. All of this would happen automatically once the smart contract is initialized by the delivery of goods. A smart contract could also be set up to automatically send an invoice to a funder for financing if it’s over a certain amount.
It’s easy to see why this technology could be so powerful for all entities, buyers, suppliers, and funders, involved in supply chain finance. Blockchain has the potential to significantly affect many aspects of the supply chain finance business But because this technology is still in its early days, the operational efficiencies and potential of blockchain technology as it relates to supply chain finance remains to be fully realized.