Blockchain-based solutions to both physical and financial supply chain issues are being proposed by a number of startups. Vendors in the physical supply chain space include CargoChain and Everledger, which is focused on ensuring authenticity and minimizing fraud in the international trade of diamonds (and also, more recently, fine art). Blockchain immutability, together with the transparent, multiple-party access it provides to the same shared ledger, are seen as key functional attributes to improving efficiency in the supply chain process of tracking the changing ownership of goods.
As goods pass from seller to buyer in the supply chain, so monetary payments are required. Enabling these transfers to take place, and ensuring that companies are paid faster (against a backdrop of higher credit costs and corporate priorities for increased cash flow) is facilitated by financial services companies, whose mechanisms for this are commonly referred to as either supply chain finance or trade finance. Managing supply payments against invoices and related cash management can be a burden, and increases greatly in complexity when transactions are across national borders, involving correspondent banks as intermediaries.
Trade finance processing has historically been supported by offerings from vendors such as Misys, SAP and Surecomp, and implemented by traditional banks as a service to their corporate customers.
A common trade finance offering provided by banks (and increasingly by alternative financial services providers) is known as factoring, and involves a bank paying the seller of goods before the buyer of those goods makes the payment. Naturally, banks charge rates (typically 4 percent to as high as 8 percent) to the supplier for this service, but assume the risk that the buyer delays payment or even defaults. Despite that protection, factoring is a costly undertaking for suppliers, eating significantly into margins and introducing an element of insecurity to the payment picture.
For all parties, factoring involves multiple risk factors including nonpayment, duplicate payment, misrepresentation and even fraud. And setting risk aside, processing costs related to manual due diligence, document collection and coordination of remittances are high.
However, blockchain approaches are also being proposed to boost efficiency in this area, with developments from the likes of Skuchain and Fluent.
"Currently, bank-run trade finance programs require a tremendous amount of resource-intensive due diligence, document collection and processing, including coordination of remittance information. Financing rates are high for the businesses despite the low and shrinking margins for the financing provider. This is especially true at smaller banks who lack this infrastructure and must outsource these services for their larger clients," notes Lamar Wilson, CEO of Fluent.
Founded in 2014, Fluent offers a number of blockchain-based services for banks, other large companies and non-bank lenders. These include applications for real-time B2B payments, supply chain finance and a peer-to-peer working capital marketplace.
By leveraging purpose-built blockchain technology in its Fluent Network, the vendor is able to improve upon current trade finance in a number of ways:
- Invoices can be tokenized once a buyer approves them, avoiding duplicate and fraudulent invoices across the network.
- Such approved payables can be split up and sold in a variety of ways, including incrementally, in a multi-lender marketplace. Lenders can purchase parts of invoices to reduce risk, lowering the cost of capital to the supplier.
- There’s no more need to track and coordinate remittance information. The blockchain immutably captures the data attached to each invoice, allowing a buyer to easily pay without needing to know who owns the invoice.
“On the Fluent Network, finance providers are sure the risk associated with duplicate and fraudulent invoices is mitigated by the tokenization of each invoice, creating a digital asset that can be transferred between markets, partially financed by multiple parties and grouped together to create new assets,” notes Wilson, adding: “Payments are programmatically tied to each invoice so buyers do not have to collect additional remittance information and can simply pay the invoice directly on the Fluent platform no matter who owns the assets across the globe.”
Since its founding, Fluent has raised $2.5 million in financing from a number of sources, including ff Venture Capital, Digital Currency Group, Fenbushi Capital, Crosscut Ventures, Lindbergh Tech Fund, the St. Louis Arch Angels, Draper Associates, Thomson Reuters, 500 Startups, UMB Bank, SixThirty and others. The company also recently announced Kansas City, Missouri-based Commerce Bank as a pilot user of its services.
Information and media giant Thomson Reuters’ investment in blockchain is driven by a desire to understand the technology and its potential real-world applications. According to a blog post, the company is working on “delivering a couple of early proof-of-concepts to test the effectiveness of blockchain on Thomson Reuters use cases. We are in the game to be a leader and trusted advisor to our customers about blockchain, and to develop real applications as this technology matures.”
Note: Fluent, CargoChain, Commerce Bank and Everledger are among the companies presenting in the supply chain stream at the Distributed: Trade conference taking place on June 14 in St. Louis, Missouri. SixThirty and Thomson Reuters will also be part of the program. Panel sessions will cover how blockchain is being applied to supply chain management and trade finance, within financial services, and how businesses can integrate with blockchain technology. More at www.godistributed.com/trade.