Understanding the Role of Blockchain Technology in Streamlining Supply Chain Finance
Ritesh is a business-focused, technologically driven professional who works towards continuous business results.
The digital transformation wave has disrupted the way organizations conduct their day-to-day business activities, including supply chain finance (SCF). SCF processes can often be slow, inefficient, and prone to errors due to excessive manual intervention. However, blockchain—the decentralized, distributed digital ledger technology—has the power to make the SCF process more streamlined, secure, and transparent by recording immutable transactions and keeping user information confidential.
What exactly is supply chain finance?
SCF, also known as reverse factoring, is a set of technology-based business and financing processes that connects various parties involved in a transaction—buyers, sellers, and financial institutions—to minimize financing costs and improve operational efficiency.
Buyers opt for SCF which allows them to pay a fee to the financial institution and ensures that the supplier receives the complete payment in a timely manner. The supplier sends the invoice to the financial institution’s SCF platform. Using the same platform, the buyer approves the invoice and the financial institution releases the payment. Once the invoice matures, the financial institution debits the amount from the buyer's account.
How does blockchain fit into this equation?
There are three major areas of concern for SCF – control, trust, and cost. These can be addressed by enhancing the speed and transparency of the entire supply chain, and this is where blockchain can play a significant role.
Blockchain technology provides a secure way to manage the end-to-end SCF process, from onboarding to final disbursal, by:
•Registering transactions cryptographically using a shared database
•Enabling all the involved parties to work on a single, shared ledger through smart contracts
•Monitoring information and documents as they move from one user to another
•Creating and saving hashes on the blockchain for each invoice, based on predefined parameters
•Detecting outstanding invoices or finances from the buyer or seller
•duplicate and fraudulent invoices and requests with dedupe checking
•Facilitating digital KYC, thereby reducing due diligence costs
What are the key advantages of blockchain-based supply chain finance?
Blockchain allows all the involved stakeholders to monitor the complete chain of events, thereby bringing more control and transparency into the process. Furthermore, blockchain technology adds numerous enhancements to the SCF process, including:
•Real-time visibility into transactions and validation of invoices
•Secure immutable ledger to store information related to financial requests and invoices
•No risk of double-spending or redundant invoices across the chain
•Comprehensive reporting to analyze pending, approved, and rejected requests
•Automated disbursal and repayment using smart contracts
•Fast and easy supplier onboarding.
In a nutshell
For organizations across industries, strategic supply chain financing is crucial for creating valuable relationships with their buyers and suppliers. The need of the hour is to digitize the complete process while bringing transparency and improving traceability across the SCF process.
Enterprises must consider selecting a solution for blockchain-based SCF to smoothly manage working capital, increase liquidity, mitigate risks, and enhance operational efficiency. By leveraging a digital solution, organizations can minimize costs across the chain. Blockchain-based SCF, with its potential to become the perfect platform for collaboration between all involved parties, is set to transform the future of supply chain finance.
The digital transformation wave has disrupted the way organizations conduct their day-to-day business activities, including supply chain finance (SCF). SCF processes can often be slow, inefficient, and prone to errors due to excessive manual intervention. However, blockchain—the decentralized, distributed digital ledger technology—has the power to make the SCF process more streamlined, secure, and transparent by recording immutable transactions and keeping user information confidential.
What exactly is supply chain finance?
SCF, also known as reverse factoring, is a set of technology-based business and financing processes that connects various parties involved in a transaction—buyers, sellers, and financial institutions—to minimize financing costs and improve operational efficiency.
Buyers opt for SCF which allows them to pay a fee to the financial institution and ensures that the supplier receives the complete payment in a timely manner. The supplier sends the invoice to the financial institution’s SCF platform. Using the same platform, the buyer approves the invoice and the financial institution releases the payment. Once the invoice matures, the financial institution debits the amount from the buyer's account.
How does blockchain fit into this equation?
There are three major areas of concern for SCF – control, trust, and cost. These can be addressed by enhancing the speed and transparency of the entire supply chain, and this is where blockchain can play a significant role.
Blockchain technology provides a secure way to manage the end-to-end SCF process, from onboarding to final disbursal, by:
•Registering transactions cryptographically using a shared database
•Enabling all the involved parties to work on a single, shared ledger through smart contracts
•Monitoring information and documents as they move from one user to another
•Creating and saving hashes on the blockchain for each invoice, based on predefined parameters
•Detecting outstanding invoices or finances from the buyer or seller
•duplicate and fraudulent invoices and requests with dedupe checking
•Facilitating digital KYC, thereby reducing due diligence costs
What are the key advantages of blockchain-based supply chain finance?
Blockchain allows all the involved stakeholders to monitor the complete chain of events, thereby bringing more control and transparency into the process. Furthermore, blockchain technology adds numerous enhancements to the SCF process, including:
•Real-time visibility into transactions and validation of invoices
•Secure immutable ledger to store information related to financial requests and invoices
•No risk of double-spending or redundant invoices across the chain
•Comprehensive reporting to analyze pending, approved, and rejected requests
•Automated disbursal and repayment using smart contracts
•Fast and easy supplier onboarding.
Buyers opt for SCF which allows them to pay a fee to the financial institution and ensures that the supplier receives the complete payment in a timely manner
In a nutshell
For organizations across industries, strategic supply chain financing is crucial for creating valuable relationships with their buyers and suppliers. The need of the hour is to digitize the complete process while bringing transparency and improving traceability across the SCF process.
Enterprises must consider selecting a solution for blockchain-based SCF to smoothly manage working capital, increase liquidity, mitigate risks, and enhance operational efficiency. By leveraging a digital solution, organizations can minimize costs across the chain. Blockchain-based SCF, with its potential to become the perfect platform for collaboration between all involved parties, is set to transform the future of supply chain finance.
