Supply chain finance is one of the concepts countering conflicting interests that arise from buyers extending their payment terms and the suppliers’ desire to receive payment instantly.
This model mitigates the risks involved in the financing of digitized global supply chains, by enabling adequate working capital and providing the appropriate liquidity.
As such, a supplier, with approved invoices, can receive the full amount owed by sourcing for funds from financial institutions. In turn, the financiers can provide extensions on the payables depending on the credit-worthiness of the buyer in question.
The critical appeal of this methodology has propelled the supply chain finance sector in recent years, with revenue generated in 2019 estimated to be between the $50 billion and $75 billion range.
However, as noted by Global Supply Chain Finance Forum, a consortium of industry associations, the occurrence of non-conforming accounting and predatory practices threaten to slow down the growth of the market.
For one, the influx of regulatory and reporting requirements has created distortions that are too complex for traditional systems to resolve. Likewise, the unethical bullying of small and medium-sized enterprises into unfavorable supply chain finance programs is yet another pain point that could downplay the efficacy of this practice.
The lack of transparency of such programs fosters a marginalized market where suppliers are at the mercy of financiers and core enterprises. Notably, this hurdle, coupled with the expensive nature of traditional financial processes, has resulted in high financing costs at the expense of SMEs and suppliers.
Even when transparency is not the bone of contention, the authenticity of information necessary for smooth operations are in question. Hence, inadequate capital liquidity stemming from the inefficiencies of clearing, settlement, and reviewing systems often plague the supply chain finance market.
Bearing these limiting factors in mind, Amplify, one of the solutions focusing on eliminating these challenges, has introduced an enabling DeFi architecture that can bridge the digital and financial requirements of supply chain finance.
I had the opportunity to get a few answers from Eugene Tan, CEO and founder of Amplify. In the interview, Tan discussed the workings of Amplify and its integral role in the vast global supply chain. Below are some excerpts from the interview.
Edward Moon: Can you please explain the core function and benefits of supply chain finance to our readers?
Eugene Tan: Supply chain finance is a subcategory of trade finance and exists to assist vendors, especially farmers or even just small and medium manufacturers, who sell goods to buyers. More often than not, the buyers will ask for a long credit period before the payment is made. And during this instance, the suppliers will have to find ways to sustain their cash flow from purchasing of raw materials to production and to delivery. Supply chain financing is there to bridge and mitigate this “break in cash flow cycle” and enables the business not only to survive but also to grow.
Edward Moon: What are the limiting factors of this approach to supply chain financing? Is it possible to find the right balance for the relationship between suppliers, enterprises, and financiers?
Eugene Tan: Great question. There are several limiting factors in the current system, and these factors are affecting the global economy more than we can imagine. 45% of financing applications by SMEs get rejected — why is this happening? A number of reasons. First, financial institutions stand to make too small margins on SMEs supply chain financing, which is another way to say that it’s too expensive for them to do their due diligence on the vendors. Secondly, shipments are hard to track as well as transactions. Last but not least, the cost of borrowing for the vendors is simply way too high. Of course, we believe that the balance can be found and this is why Amplify exists.
Edward Moon: How does Amplify enter the fray?
Eugene Tan: Understanding the pain points, Amplify goes straight at them. Digitization, and more specifically decentralization and blockchain technologies, in business applications is the way forward and businesses will sooner or later need to adapt and move along this direction in order to compete in this economy 4.0. We want to build on the infrastructure of blockchain to provide a safe, efficient, and trustworthy process for business to take place. It has to be game-changing and be at the forefront.
Edward Moon: Why have you and your team opted for DeFi architecture? Will decentralization promote an enabling environment for small businesses as well?
Eugene Tan: Decentralization is an enabler by definition for us. In the financial world, decentralization allows for a level of abstraction that eases the flow of assets while keeping it traceable, affordable, and transparent. To be more specific the aspects of DeFi that are most relevant for Amplify are: tokenization of assets to be used as collateral, the ability to easily generate capital liquidity via liquidity pools and opportunity to offer important financial products — like borrowing and lending — at a cheaper rate thanks to the reduction of middlemen.
Edward Moon: Tell us more about the governance of the platform.
Eugene Tan: “Caution” is a good word for our approach. We are not in this with aggressive disruption in mind, believing that any institution that will be involved with Amplify will magically switch to a decentralized system in a snap of fingers. Rather we acknowledge that there will be a learning curve and that our function initially will be that of a bridge between on-chain and off-chain stakeholders. Hence our decision to have governance happening on-chain but with big chunks of that process happening off-chain first. The most important thing for us is to ensure that our governance strategies allow for middlemen to be removed, that it is the primary obstacle for and inclusive supply chain finance.
Edward Moon: Who are the entities that will oversee credit-rating operations, and how you will ensure the efficacy of the process involved?
Eugene Tan: We are working with strategic partners who are proficient in this respect and have connections with the necessary credit bureau. This credit rating is just for reference as in a Defi environment, it is the community who decides if the loan will be granted. Moreover, Amplify loans put a basis on transactions unless proven the borrower has poor credit history.