By: Todd McDonald, Sophie Holm, Alisa DiCaprio, Gabriella Zak
What are the key take-aways?
Flipping open the orange shoe box with the iconic white Swoosh mark, you reverently remove your new Nike sneakers. But before your brand-new sneakers arrived in your hands, they travelled through a complex supply chain, from raw material to finished product. In just the raw material process alone, Nike uses over 1,500 independent companies.
Supply chain processes are essential for bringing us the products we love, but the financing component is fraught with systemic inequalities. While Nike’s first few levels of suppliers are able to access finance at favorable rates, the suppliers of those suppliers may not. The problem is visibility.
But what even is deep tier finance? It’s supply chain finance that reaches into enterprises at the beginning of a complex supply chain. Think of it as a supply chain in reverse for capital, originating from a financial institution, flowing to the focal company, and disseminating through the tiers of the suppliers. The friction comes from the KYC process.
Why is financing deep tier suppliers problematic?
Supply chain finance today accesses only the top tier of suppliers. At the long tail, mostly small and medium sized enterprises (SMEs) face high rates and difficulty accessing working capital.
In a complex supply chain, capital-providing institutions have confidence in the business transactions of the first few tiers of suppliers. But the weaker accounting practices of deeper tiers increase risk profile perceptions. Borrowing rates can escalate to double digits.
In addition, since SMEs tend to have a low volume of transactions, costly spend on KYC makes the financing exercise not worthwhile. In the 2018 ICC survey, 40% of banks identified KYC as a persistent challenge for delivery. And troublingly for SMEs, 79% of banks expect trade finance shortfalls to remain the same or worsen over the next year. The way we do finance today isn’t working.
Is blockchain a solution?
Distributed ledgers facilitate data exchange in a fundamentally new way. These differences can address the problems faced by suppliers in the long tail of the supply chain in three ways:
Each of these features shows that the benefits of blockchain in trade finance can transfer directly to those corporates that are least linked in to the trade ecosystem today.
So we have the solution, but how will corporates link in?
But just having a product isn’t enough. To enable firms with limited resources to access new supply chain and trade finance solutions, R3 and our partners, like Trade IX, have a strategic vision for ERP integration. R3 is also currently tackling the ERP integration challenge with Commerzbank, recently completing a successful end-to-end integration between SAP S/4HANA business processes and R3’s Corda blockchain platform.
Corporates in the supply chain should be able to link into new solutions seamlessly. Because these firms have limited resources to integrate new technological solutions with their existing ERP, the solution is best applied at the level of the provider.
What does the future look like?
Blockchain will finally shed light on the deepest tiers of the supply chain. No longer will SMEs be limited to expensive access to capital with few providers. With initiatives like Marco Polo, the playing field can be leveled, equalizing trading finance for all.
Interested in learning more about blockchain deep tier financing? Check out this panel from Coindesk Consensus 2018 (Day 2, Session 23).
January 11, 2021
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