Blockchain payment systems are emerging as a possible solution for the lack of financing that plagues small-to-medium sized enterprises (SMEs) in China. It hurts MNCs when supply chain partners have limited or only costly access to financing. It is not an easy task to replace a trusted supply partner. In many industries, it takes months to onboard new suppliers, who must first pass a battery of compliance checks. Yet, suppliers may cut corners to stay afloat should they hit a cash flow crunch. This could put customers at risk.
The heart of the issue
At the heart of the issue is a financial system that favours big players. Banks and financial institutions are not motivated to finance the multitude of smaller firms.
An experienced blockchain expert explained at a recent China CFO Forum meeting, ‘Banks are not willing to provide financing to SME owners because they lack data to create a comprehensive profile of smaller players and are unable to assess the credit risk of SMEs. The banks have large SOEs and MNCs banking with them that bring them a lot of business. There is little interest in banking with the smaller guys.’
(For an in-depth review of China financing issues see Managing China’s Receivables Risk as Market Stress Rises and Will China’s Quiet Debt Clean Up Succeed?)
Lowering financing costs with blockchain
Blockchain encryption offers a way of lowering the cost of financing for SMEs. It allows large, reputable companies to extend their credit rating to the smaller players in their orbit. Consequently, the smaller firms are able to access financing at favourable rates. Thus, larger firms with good credit ratings can increase their suppliers’ access to working capital without any additional costs.
A blockchain payment is essentially a promise of future payment. A blockchain payment platform selectively and securely hides and reveals information about each transaction as the promise of payment cascades down the supply chain.
Better control over information
The ultimate customer at the top of the supply chain (also known as the ‘anchor’) has full control over information on the blockchain platform. It can decide what information to make available on the payment instrument and to whom it is available. The blockchain system uses private and public encryption keys that only designated people along the chain have access.
Banks and fintech leaders Ant Financial and Tencent are piloting blockchain platforms. The anchor makes the payment to its designated platform when payment is due. The platform then automatically transfers the payment to the relevant suppliers holding the blockchain tokens on the platform. In the process, the customer can potentially gain visibility on vendors deep in its supply chain.
The brand recognition of MNCs brings real value within the blockchain system. Suppliers and banks financing suppliers are likely to accept a guarantee of future payment if the payment comes from a customer that is well known. Foxconn, the world’s largest electronics contract manufacturer, is currently piloting this system with a significant portion of its accounts payable (AP).
Handling sensitive information
Blockchains also provide valuable tracking information. Blockchain data allows manufacturers to track supplier components and is more secure than other forms of supplier tracking. This has become particularly valuable for pharmaceuticals, food and agriculture, where quality concerns are paramount. An IMA Asia China CFO member commented, ‘In a long chain, one is never 100% certain somebody might not tamper with the information, changing the source to use an unverified supplier. But with blockchain the information is secure.’
Click on the ‘Deep Read’ button to read more about how companies are using blockchain in China to reduce financing costs and improve component tracking and quality.
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