A Theory of FinTech and Trade Finance
35 Pages Posted:
Date Written: February 1, 2021
Problem Definition: Smart contract improves the supply chain efficiency by enabling the supplier's commitment to post-shipment financing that mitigates the bank's lending risk exposure and thereby reduces the financing cost. Invoice trading offers better liquidity and faster transaction speed, which allow the supplier to make the post-shipment financing decision upon liquidity shock in contrast to factoring market. This paper investigates how these two types of FinTech adoptions could facilitate the trade finance activities and create value for supply chain firms. Academic/Practical Relevance: As the emerging FinTechs could potentially reshape the trade financing landscape, understanding the impact of FinTech adoption and its interaction with trade finance activities is practically relevant and of great importance. Methodology: We develop a two-stage game-theoretic model and adopt supply chain finance theory to characterize firms' operations and financing strategies in the presence of various FinTech applications. Results: We find that the value of FinTech adoption depends critically on the trade financing structures, including both pre-shipment and post-shipment financing schemes. Under the baseline trade finance model (with purchase order financing and traditional factoring), smart contract leads to win-win outcome for the supplier and the retailer. When buyer direct financing is adopted for pre-shipment financing, smart contract might demotivate the retailer to offer buyer direct financing, which benefits the retailer but significantly hurts the supplier and therefore reduces the supply chain profit. When on-demand invoice trading is adopted for post-shipment financing, the supplier and retailer profit are increased due to its flexibility. However, it completely wipes out the value of smart contract since there exists no commitment issue. Lastly, though supply chain digitalization facilitated by FinTech helps lower the financing cost, it might either hurt the supplier or the retailer. Managerial Implications: Our findings provide guidelines for and insights into when smart contract and invoice trading should be adopted and their interactions with different trade finance schemes. In particular, such FinTechs do not always enhance the supply chain value.
Keywords: Trade finance, supply chain finance, FinTech, smart contract, invoice trading, purchase order financing, buyer direct financing, factoring
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