Dynamic Trade Finance in the Presence of Information Frictions and FinTech

Blockchain and supply chain finance: a critical literature review at the intersection of operations, finance and law

“…Moreover, the limited visibility does not only ignite more than 25,000 disputes in SCF every year with USD 100 million tied up at any given time [ 15 ], but also hampers the collection of receivables for the core firm [ 47 , 92 ]. The lack of visibility impedes trust and commitment among supply chain partners [ 46 , 119 ] and foments moral hazard problems [ 34 ] as well as more general adverse effects of information asymmetry [ 35 , 91 ], which result in sub-optimal operational decisions that expose stakeholders in supply chains to financial risks [ 10 , 13 , 127 ]. As a result, many actors in the chain operate in opacity and a large group of MSMEs are precluded from SCF [ 45 ], especially if they do not transact directly with the core enterprises [ 93 ].…”

“…Visibility provides transparency, which is crucial for orchestrating SCF programs [ 92 ] as it solves issues of information asymmetry within the supply chain that drive financing costs higher [ 45 , 93 ]. Since the SCF decisions and premiums are driven by the fluctuation of credit risk [ 55 ], information transparency provided by blockchain enables financers not only to view the credit history of the applicant [ 47 ], but also to monitor other related operational and financial data, such as order quantities, latest warehouse, shipping, and payment statuses [ 69 ], thereby gauging their risk estimations dynamically [ 91 ]. The traceability of collaterals in providing SCF solutions is a key benefit distinguishing blockchain ecosystems from other existing platforms [ 9 , 30 ].…”

“…The benefits of blockchain in eliminating or reducing information asymmetry have recently been analysed using game theory in Chod et al [ 35 ] and Lee et al [ 91 ]. Based on a signalling game between a buyer and a bank, Chod et al [ 35 ] show that signalling operational quality through larger purchase order quantities leads to less disruptions than cash signalling in the form of inflated loan requests.…”

“…Focusing on transaction costs, Choi [ 36 ] shows that blockchain-based transactions in a newsvendor setting lead to higher profit than a bank-mediated trade, if the blockchain transaction costs are sufficiently lower than the bank charges. Lee et al [ 91 ] compare dynamic interest rates with uniform interest rates in an abstract multi-stage trade finance setting where the bank may benefit from blockchain by reducing the information asymmetry or improving the efficiency of information flows. When there are long delays in collecting reliable information, the blockchain is required for the dynamic interest rates to be rewarding [ 91 ].…”

“…Lee et al [ 91 ] compare dynamic interest rates with uniform interest rates in an abstract multi-stage trade finance setting where the bank may benefit from blockchain by reducing the information asymmetry or improving the efficiency of information flows. When there are long delays in collecting reliable information, the blockchain is required for the dynamic interest rates to be rewarding [ 91 ]. The academic studies on blockchain SCF are summarised in Table 2 .…”