Why Blockchain Changes Supply Chain Finance and Logistics in Asia

By Max Ward

As with the introduction of other new technological advents to the global economy, understanding of how decentralized ledger technology and blockchain is really used to drive economic value is sometimes met with contradictory views.

Blockchain holds tremendous promise, but as a new technology itself can be difficult and expensive to build upon. Claims of its utility vary from revolutionizing how funds are transferred, how products are traced in the supply chain, and replacing the byzantine letter of credit process with an instantaneous and trusted ecosystem, but the industry is awash in proof of concepts and lacking measurable case studies.

The oil and water mix of blockchain sceptics and hype-driven enthusiasts is being slowly replaced by the new realities of what we can now do which we could not do before. We do know that decentralization of data and consensus improves trust between parties. We also know that trade and logistics in emerging markets takes much longer and costs more than it should. Blockchain should be able to improve this. Exactly how that happens and what it means is becoming increasingly clear.

Part of the process to obtain further clarity requires separating the protocol layer from the application layer. The application layer is how businesses and users connect to the technology. This is generally specific to a certain market, industry, country, or even customized for a specific supply chain. Not all transactions in this layer need to use blockchain (user logins, running reports or analytics, etc.). The underlying blockchain protocol layer is an essential component and source of value, but it needs to be realized through the application layer.

Certain supply chain information (for example, what was delivered in a shipment that needs to be paid for) can be decentralized and validated by consensus. This is interesting for the goods owner (e.g. a multi-national consumer goods company such as Nestlé), but is materially valuable to a third party who assesses risk and wants to know if fraudulent data can at any point enter the system. These include financial institutions (banks) and a growing cohort of new liquidity providers (start-ups) whose business model is built on reducing risk through blockchain technology and other means. Putting a credit score on a transaction incorporates not just the credit worthiness of the seller and buyer, but also the risk of the class of invoices themselves. The parties that assess risk show a measurable preference towards working application layers (systems) that prove the delivery of goods, so that the freight invoice and invoice for the goods can effectively be collateralized. This is supported by an audit trail — powered by micro-incentives and a protocol layer — creating a reduction in invoice risk meaning a lower cost of capital, faster approval, and improved access to credit for shippers and transporters.

Imagine doing supply chain financing on domestic goods transactions, in Philippines or India, on a paper process. It takes up to a week for paper documents to come back, which then need to be reconciled against the original purchase order for the goods. As there is no audit trail on the proof of delivery documents, the risk of inaccurate or even fraudulent data becomes so significant banks will either refuse and opt out of financing such supply chains, or the cost of capital is higher than SMEs can afford; it also takes time for submission of documents and loan approvals to come through.

With a functional blockchain-enabled application layer for tracking goods distribution in a given market, digital documents can be quickly presented to the financial institution for rapid approval, and cash can be made available in only a few days, for as low as 20% annual interest cost (1–2% monthly). Previously, suppliers waited up to four months or faced a 5% monthly interest charge that took weeks to process.

Reduction in working capital and improved timing of access means that the small business can now grow and improve their profits where before they ran into a lack of liquidity — often the difference between inability to pay staff and producing a healthy and growing profit. Combined with micro-incentives to drivers and other actors in the logistics ecosystem who were previously left out or disenfranchised, opacity and unfair trade models can be replaced with new ones, and supply chains can start to work the way we want them to work, instead of failing to meet the needs of stakeholders. Country by country, supply chain by supply chain, shipment by shipment, a new ecosystem is taking shape.

Max Ward is the founder and CEO of OpenPort, and a Director of the OEL Foundation. OpenPort is currently pioneering supply chain financing applications using blockchain enabled proof of delivery to help transporters and SMEs receive payments faster.

To learn more about the OEL Foundation, please join our community on Telegram or write to us at hello@oel.foundation.