Trade is the largest and most robust component of global economic activity but shifting geopolitical and economic forces have recently transformed the space. Primarily, the increasingly competitive global manufacturing marketplace has resulted in a dynamic where buyers have more power than suppliers. Think higher supply than demand, which results in favorable conditions for the purchaser. This has offered the buyers the choice to operate on payment terms called “open account,” which means that the supplier must manufacture and ship the goods 30-60 days before the buyer is required to pay. Open account transactions are becoming the norm, but they place heavy working capital pressures on the suppliers. Imagine being employed but not receiving a check until two months after your work. Banks work with suppliers and buyers to alleviate these constraints by providing “open account supply chain finance” through a number of financing vehicles that involve issuing liquidity at a discount.
To illustrate, imagine The Home Depot purchasing $100,000 worth of lawn-chairs from a small manufacturing company in Japan. This Japanese supplier is thrilled to have a purchase order, but does not have the capital to furnish all of those chairs. The Home Depot and supplier then engage with a bank who is able to immediately provide the supplier with $95,000 to make the products. The manufacturer builds and ships the goods, and 60 days later, The Home Depot pays the bank $100,000. In this way, the bank profits from the difference ($5,000), and the manufacturer receives immediate liquidity.
In order to provide this type of financing, banks must perform due diligence on the parties that are involved in the transaction. Due diligence is a fancy term that is comparable to an in-depth background check. Due diligence is an arduous process that is costly, time-consuming, and largely inefficient. This project partners with a top global bank that is looking to eliminate these inefficiencies through the use of Distributed Ledger Technology. The Distributed Ledger Technology (colloquially referred to as Blockchain) is the technology that underpins Bitcoin. In essence, Distributed Ledger Technology is a digital platform for multiple parties to exchange and access valuable resources in a permissioned, secure, and synchronous manner. This project will culminate with the creation of a prototype application that will streamline much of the due diligence process in open account supply chain finance.
I’m extremely grateful to be working on this capstone thesis project. The team members I am working with have been incredible resources and mentors. In October, I met in-person with the team in Southern California. Last week I met with the team in San Francisco. I can’t wait for what’s to come!