The Asian Development Bank has published a white paper on deep-tier supply chain finance (DTSCF), which potentially extends financing access and transparency down the chain to even the smallest suppliers.

The paper includes analysis of the role and different approaches of fintechs Skuchain, Banco and KashBank may take in the global realisation of this digital financial solution that can involve letters of credit (L/Cs).

Skuchain's platform, for example, uses proof of provenance codes to track the flow of goods and secure smart contracts governing an entire purchase cycle, which give corporates the ability to digitise L/Cs, purchase orders, invoices and bills of lading (DC World News, 26 May 2020).

Corporate anchor

The DTSCF financial solution leverages business relationships within the supply chain that link back to a "corporate anchor," unlocking working capital to make financing accessible for suppliers throughout the ecosystem, not just those in the first tier that have access to funding.

In addition to closing financing gaps for smaller companies, the solution opens the potential to make supply chains more transparent.

Successful modelsThe brief outlines the opportunities that DTSCF and its underlying technology can offer, and provides a sample of models that have been successfully implemented.

In the Skuchain model, for example, the DTSCF flow starts with an early payment request against a parent trade instrument such as an L/C, purchase order, invoice, or advanced shipping notice. The early payment request can come from any tier of supplier.

DTSCF flows

The supplier uploads an encrypted trade instrument to the validated trade chain, defining the amount needed as early payment and the fields it wants visible to the anchor and tier-1 supplier.

The paper goes on to explain how the DTSCF flow continues and the roles different actors in the supply chain, including banks, play in that flow.

Prospects and challenges

While the paper is optimistic that DTSCF can play a role in improving supply chain flows, some of which have been badly disrupted since the pandemic, the paper also assesses the challenges and solutions to its global expansion.

It concludes, for example, that legal systems need to be more receptive to DTSCF and other digital forms of trade, greater incentives are required to speed its uptake, and banks and companies need to agree on interoperable technology.

The ADB's white paper, Deep-tier Supply Chain Finance, can be found here.

This article represents the views of the author and not necessarily those of the ICC or Coastline Solutions.