PO Financing – (Purchase Order Financing) For example PO financing and invoice financing is one of the big blockchain use cases for trade finance.
A PO – Purchase Order – is a document issued by a buyer to a seller, and it has a description of the goods that a buyer wants to buy and their respective offer. There are different parties involved in PO financing: a seller, a buyer and a bank.
PO financing is a form of short-term financing where the objective is to have the bank lend money for a short period to the supplier/manufacturer to allow enough time for the buyer to pay the invoice. The issue is that the banks often reject PO financing because of the risks involved. There are risks related to the track record/risk of the buyer. Will the buyer pay for the goods?
There is the risk related to PO fraud, where the supplier can fake or tamper the PO and other frauds like duplicate financing, where the supplier presents the same PO to multiple banks simultaneously.
How to solve these risks? Blockchain!
A PO Financing blockchain application allows different banks to have a node participating in the network. PO data is then synchronized across all the participants allowing everyone in that PO transaction to have access to the same data, and it will allow the creation of audit trails for other banks.
For example, they can share only the hashes of the transactions between them, allowing them to trace and audit the transactions. Hashes are pre-image resistant, i.e. can’t be reverse engineered, offering a good level of data protection. When the PO is presented, data is stored in the bank node.
Then, the PO hash is shared across the network to the other banks. This way, the banks in the network know if the same PO is presented simultaneously because the PO’s hash would be the same.
The mechanism allows the banks to compare POs without actually sharing the details in the PO. In this same PO application and hashing mechanism, it is possible to verify that the buyers’ identity exists, verifying the KYC hash of this buyer, allowing the bank to check that the buyer actually exists and has a good track record.
So you see that in this use case, blockchain enables the banks to share data without having to worry about breaching data regulations and data privacy. All the parties can use the blockchain data as a trusted source of information to make better credit decisions and reduce risks for everyone.
There is a multitude of supply chain applications using blockchain. Supply chain financing, supply chain traceability is one of the most useful use cases with use cases to improve product sustainability and fair trade – traceability of diamonds, coffee, palm oil, tuna and other products. Blockchain is also useful in fighting counterfeit products and luxury goods. Embedding an identifier of the product in the blockchain (NFT’s or NonFungible Tokens, for example, is useful in this case).
Projects like the Walmart/IBM Food Trust and Circular improve many products’ traceability, which helps prevent the spreading of foodborne diseases. Better traceability can help save lives by quickly allowing track/trace and discard produce from affected farms.
All Walmart suppliers for fresh leafy greens are currently required to use the Food Trust blockchain to record their products in the supply chain, as we will see in a bit.