blockchain in supply chain finance (scf) -...

SUPPLY CHAIN FINANCE (SCF) ON BLOCKCHAIN

W H I T E P A P E R

1. Introduction

2. How Blockchain (DLT) solves the issues?

3. Supply Chain Finance Solution on Blockchain

1. Reference Architecture on Blockchain

2. Logical diagram with technology stack

3. Blockchain network components

4. Future Roadmap & possibilities

5. Conclusion

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TABLE OF CONTENTS

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INTRODUCTIONSupply Chain Finance (SCF) is defined as a portfolio of financing and risk mitigation techniques and practices that support the trade and financial flows along end-to-end business supply and distribution chains, domestically as well as internationally” It optimises the management of the working capital and liquidity invested in supply chain processes and transactions. SCF in its entirety encompasses the entire value chain of a company’s operations from Purchases to Sales. While the SCF product suite consists of products like Purchase Order Financing, Payables Financing and Distributor/Dealer Financing, for the purpose of this paper, we focus only on the buy side of a company’s operations and illustrate the Payables Financing/Reverse Factoring (financing of suppliers of large credit worthy buyers) product. Payables Financing under SCF is a financing mechanism in which a supplier gains access to liquidity based on an purchase order and/or through an invoice raised on a buyer. The buyer’s acceptance of the goods supplied by the supplier (vide the buyer’s acceptance of the invoice) transfers the credit risk of the financing transaction to the buyer. All parties involved derive benefits from the Supply Chain Finance solution– the buyer, the seller and the financing providers – a bank or an NBFC.

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SCF ON BLOCKCHAIN - WHITE PAPER

Buyers • Improved payment and commercial

terms and liquidity optimisation

• Greater supply chain stability • Benefit of improved operating

processes through automation

Finance Providers • High quality transaction-based short

term finance based on the credit of a prime buyer

Sellers • Finance raised against a strong credit

rating with lower implied cost of funding

• Working capital optimisation with improved cash flow forecasting and flexibility

• Alternative sources of funding with reduced use of credit availability from traditional banking sources

• Ability to manage significantly longer payment terms imposed by financially strong buyers

As per the World Trade Organisation (WTO), currently only 25% of total value of trade flows are financing as against a potential market of 80-90% of trade flows. There are varied reasons for this situation:

• Lack of trust among involved parties (human beings). • Platforms/systems used are owned by a single party (most likely the Financier/Bank) leading to

a concentration risk on the platform owner/provider or Financier/Bank. • Provenance of the transaction records. No single source of truth which is shared, proved and

trusted by all involved parties. • Manual processes with a large paper trail. • Frauds (forgery) and the ability to avail multiple financing against the same trade. • Delay in payments and accuracy of transactions.

Distributed Ledger Systems (DLT) more popularly known as Blockchain can help solve most of the aforementioned issues and introduce suitable risk mitigation, while bringing trust, transparency, efficiency and cost effectiveness into the system.

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HOW BLOCKCHAIN (DLT) SOLVES THE ISSUES?

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• Data on the blockchain is available with all involved parties. Changes and updates

are made in form of new records being added to reflect that change. No existing

data is ever changed. Any new data can only be added by consent of all the parties.

That makes the blockchain a Single Source of Truth.

• Data on blockchain is immutable, and append only. This ensures history of all

transactions is maintained. It creates an effective audit trail for compliance.

• Each participant in system is provided with a digital identity using cryptographic

keys which is used to digitally sign a transaction. This increases overall security

and hence trust into the system.

• Smart contracts can be used to automate manual process which can be triggered

based on events and executed automatically based on rules agreed among parties

with their consent. This provides the opportunity to drastically reduce cost and

introduce process optimisation.

• Privacy & sensitive information can be shared and made visible based on access

privileges given to an party. This also means that each party can be provided only

the information required rather than the entire store of information of a transaction.

• Data on blockchain can be used for real time verification and reconciliation of data /

records / transactions.


SUPPLY CHAIN FINANCE ON BLOCKCHAIN3

SCF on Blockchain is a custom designed solution which operated by Bank, Buyer and Seller to perform function like manage purchase order, invoice, invoice financing, payment and collection on maturity. The solution has been designed by Supply Chain Financing practitioners with a long vintage in the industry across geographies.

Solution is backed by permissioned blockchain (DLT) platform which is a Hyperledger Fabric. The platform is suitable for enterprise blockchain solution to maintain privacy and confidentiality of data and achieve scalability.

Following functions are backed by blockchain Matching of Invoices to Purchase Orders

The reconciliation between invoices and Purchase Orders is automated

Invoice validation and duplication check Submitted invoices are checked against the previous invoices submitted in the blockchain to

ensure that the same invoice is not accepted again in the system.

Financing request validation, duplication check Financing requests are checked against approved invoices to ensure that invoice data is not

forged and financing is extended only against existing non-financed invoices.

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Workflow status for invoice, financing etc.

Group

Invoice

Status

Submitted

Approved

Financed

Financing

Submitted

Approved

Rejected

Disbursed

Matured

Invoice tampering protection at the time of financing/disbursement Invoice data are validated based on original approved invoice at the time financing and

disbursement.

Invoice Payment instruction tampering protection at the time disbursement, recovery.

Payment instruction are validated based on original approved payment instruction which are

submitted at the time of financing approval.

Smart contract rules (validation, check, protection etc.) are customisable/configurable based on

involved parties agreement.

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REFERENCE ARCHITECTURE ON BLOCKCHAIN

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Reference Architecture is divided into different layers to achieve separation of concerns and loose coupling among components.

Presentation: User interface components and logic.

Product Processor: Business logic for product functions.

Integration: Rest APIs to integrate with Blockchain network and invoke smart contract.

Blockchain Platform: Blockchain network with deployed smart contracts.

Currently, SCF product is configured to be used by actors like Banks, Buyers and Sellers

using SCF UI. However, future developments will enable the participation of other

participants like Logistics Providers, Auditors, Insurance etc.

Blockchain network can be integrated with any existing system via well defined blockchain API

on gateway component.

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LOGICAL DIAGRAM WITH TECHNOLOGY STACK

3.2

Product is divided into multiple logical components which are as follows: UI/Client: Product User Interface component.

Product Server: Product business logic component.

Blockchain Gateway API: contains well defined Rest API interface for different

functions to interact with the blockchain network.

Hyperledger Fabric (Blockchain) node: contains smart contracts with execution

runtime, Identity provider and ledger data store.

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BLOCKCHAIN NETWORK COMPONENTS3.3

Sr.No

1

Component Name

User

Component Description

End user who operates/uses application on behalf of organisation.

2 Node Node will be considered as participating organisation in blockchain network and part of supply chain finance blockchain consortium.

3 Certificate Authority Component will be used to generate and sign certificate for user and member (peer).

4 Membership Service Component will have information related to role and responsibility of user and member(peer).

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Sr.No

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Component Name

Business Network Agent (peer)

Component Description

Component will be physical machine which will be a part of organisation and contains own identity certificate sign by CA, peer configuration like membership service config, smart contract etc.

6 Current State and Transaction log

Component will be a database (Leveldb, Couchdb etc.) to store current state of asset and activity log of asset.

7 Smart Contract Component will be a actual contract code written in go language which is deployed on peer

8 Consensus System (Orderer)

Component will be responsible to order the endorsed transaction and send transactions in order to get these validated and committed and reach consistent state.

9 Channel Channel will be created to keep data and communication private among entities like Bank, specific Buyer and Seller. Channel transaction will be available only to channel participants.

10 Core Banking System Blockchain network will be integrated with Bank's core banking system to perform actual debit and credit from/to Bank, Anchor, Seller's account.

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FUTURE ROADMAP & POSSIBILITIES4

• Deep Tier Supplier Finance (Suppliers of Suppliers) • Enable other network participants like Logistics Providers,

Auditors, Insurance etc. • Integrate with blockchain based KYC system. • Bring payment system on blockchain.

CONCLUSION5


Blockchain (DLT) is a paradigm shift which brings the advantages of the distributed ledger system to automate what has historically been a manual and paper intensive area of banking. It also has the potential to open up areas in Trade Finance which were hitherto considered challenging to address e.g. engaging the extended supply chain of corporates in the financing chain as well as increasing the velocity of deployment of working capital solutions.

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