From digitizing trade finance to creating new financial products on the blockchain, EC3 has been instrumental to making existing lines of business more profitable as well as opening up new lines of business for banks.
Banks and Financial Institutions around the world use Skuchain’s EC3 Platform to:
Digitize letters of credit and SBLCs. Letters of Credit and Standby Letters of Credit (SBLC), or Bank Guarantees, are heavily paper-based, process-intensive and error-prone. While Skuchain works with banking governance and industry consortia to streamline forms of these documents, we are first significantly cutting down on the cost of LC and SBLC operations at banks.
Using our Brackets smart contracts product, Skuchain has completely digitized an origination, negotiation and execution process for both an LC and SBLC involving counterparty banks and their respective customers. Skuchain was the first to put an entire LC transaction on the blockchain. Our bank partners in that transaction were Commonwealth Bank of Australia and Wells Fargo, and the customer was Brighann Cotton. Through our partnership with CGI, Skuchain has enabled blockchain-based trade instruments for various banks, including MUFG, BMO, NBC and RBC.
Inventory Control & Finance (ICF) on the blockchain
. Using Skuchain’s BOM Buyer, banks are able to participate in a previously obscure and expensive financing structure. Traditional invoice factoring or receivables financing is a post shipment invoice-accepted model. In this model:
- The financier provides 80% or 90% of the face value of the invoice to the seller and the remaining on final payment by the buyer (minus a discount fee).
- The financier needs to ensure that (a) The receivables are ‘perfected’ (i.e. do not have any liens, etc. and (b) The buyer has ‘accepted’ to pay the invoice and there are no disputes.
Our BOM Buyer is a completely different way of freeing up capital in the supply chain that turns inventory into financeable assets. A special purpose vehicle governed by a smart contract takes ‘title’ to the inventory, offers Buyers and Suppliers favorable payment terms, reduces the cost of financing for Suppliers and COGS for Buyers.
There are four main benefits to the BOM Buyer:
- Lower COGS for Buyers and lower financing costs for Suppliers, compared to traditional supply chain finance
- Can offer all Suppliers access to the Buyer’s cost of capital, without affecting the Buyer’s credit or having to draw from the Buyer’s credit facilities
- Ensure a much more financially healthy supply chain with minimal excess inventory on balance sheets, resulting in earlier revenue recognition for Suppliers
- Grant Buyers greater visibility and control over their supply chain with new data shared on the blockchain
What does a typical BOM Buyer deal look like?
- Four parties: a Buyer, a Supplier, a Special Purpose Vehicle (can be owned by Skuchain, a bank or by the Buyer) and a Bank
- Five steps:
- A Special Purpose Vehicle enters into a JIT sales agreement with the Supplier, and the Buyer assigns their right to make payment and receive title to the inventory from the existing Master Purchase Agreement with the Supplier.
- A Buyer offers a payment guarantee for any inventory that is part of this deal, subject to quality control, performance, etc.
- A Bank will fund the SPV at the Buyer’s cost of capital in anticipation of a deal.
- The SPV will buy inventory from the Supplier at a discount equal to the financing rate, and pay at terms advantageous to the Supplier.
- The SPV will sell the inventory to the Buyer, possibly at a lower price than the face value of an invoice, and receive payment at terms advantageous to the Buyer.
What does blockchain bring to this deal?
- Secure attestations allowing for ease of transmission: By placing agreements and trade documentation on the Blockchain, we provide a secure and trustable medium to transmit the details of a trade to various parties. This allows for portability of transaction information.
- Reduced operational friction: The investment to make any change in supply chain process is small. Supply chain partners are still able to hide information they don’t want to share with others. The ecosystem can have transparency and visibility to the extent necessary to get the best risk profile and lowest cost for financing.
- Significantly reduced workload: Operators who had to search for, compile and share the same information over and over again to banks, credit insurance companies and transaction participants are now able to streamline the process while adding security. The transaction process is standardized. There is no need to do an in-depth evaluation of each new transaction.
- Scalability and additional profit opportunities: Allows for buyers and suppliers to participate and run transactions of any size on the same platform. Multiple tiers of suppliers can now be included in the same ICF program, whereas only single tiers could participate before because of the expense and lack of visibility.
- Perpetual audit system: All aspects of the trade are now available to be audited in real time by the appropriate parties.
- Traceability: Applicable SKU level traceability can be made available to relevant parties in real time.
Enable the physical transactions of banks through track and trace. When banks hold title to goods that are being financed, they need to track these physical goods without being active participants in the supply chain or logistics process. As a cost-effective and unintrusive way to track these goods, Skuchain’s EC3 has been adopted by banks who regularly participate in physical transactions to obtain independent visibility into the production and transport process and therefore reduce the risk of fraud, theft or damage in these transactions.
Skuchain’s EC3 allows a company to tag bulk raw materials and finished goods SKUs with a Popcode, a digital ID that is logged onto the blockchain. Notations about the process and corresponding documentation can be attached to this specific Popcode. Because Skuchain’s EC3 integrates Popcodes with Brackets smart contracts, we are able to tie transactions and paperwork with a specific product across the supply chain. Popcodes may be logged onto the blockchain through the Skuchain smartphone app or industrial scanners of choice. Transactions and records may be submitted to EC3 through an API integration with ERP systems, Excel spreadsheets or other existing technology, or directly into our CRP.
Build a blockchain gateway that allows for several bank blockchain networks to be interoperable. With the proliferation of blockchain-based platforms for trade instruments, banks do not see a path of adoption since their customers will not want to become part of a network that doesn’t include their counterparties. Rather than wait to see which platforms achieve critical mass, the trade and blockchain industry should work on bolstering interoperability between different blockchain networks.
Skuchain’s EC3 handles interoperability with other blockchain networks by turning an existing customer node or a Skuchain commerce node into a blockchain gateway that will build a channel between different blockchain networks. We have also integrated systems in a more traditional manner using APIs between applications that sit on top of blockchain protocols.