Invoice Tokenization for Deep-Tier Payables Finance

Abstract

Invoices from tier-1 suppliers to the downstream anchor manufacturer can be tokenized onto a blockchain. The tier-1 suppliers are then able to split and transfer the tokens to their own (tier-2) suppliers, enabling deep-tier suppliers to sell tokens and access financing at more affordable rates based on the anchor manufacturer’s credit rating. This paper investigates how invoice tokenization impacts the multitier supply chain’s decisions and profits under different supply network configurations and contractual forms. Our research yields the following main insights. First, invoice tokenization always benefits the downstream manufacturer and the reliable tier-2 supplier, but can hurt the profits of other participants. If the tier-1 supplier allocates the manufacturer’s order between the two tier-2 suppliers with different reliabilities (i.e., in the Y-shaped supply chain), the sourcing strategy switch brought by invoice tokenization makes the unreliable tier-2 supplier worse off with a zero profit. The tier-1 supplier can also be hurt because tier-1’s leverage over the manufacturer is indirectly weakened. If the manufacturer directly decides how much to source from the two tier-2 suppliers through two different tier-1 suppliers (i.e., in the V-shaped supply chain), invoice tokenization reduces the unreliable tier-2 supplier’s production quantity and even decreases the profit when the market potential is relatively large, but the manufacturer never abandons the unreliable branch. Second, when the market potential is relatively small, the manufacturer is more likely to initiate invoice tokenization in the V-shaped supply chain. The result, however, is reversed if the market potential is relatively high. Third, direct control over the wholesale price may hinder the value of invoice tokenization for a supply chain tier. For instance, the tier-1 pricing might allow the manufacturer to extract more value from invoice tokenization in the V-shaped supply chain because of the intensified price competition among tier-1. Finally, a higher credit risk of the manufacturer can increase the value of invoice tokenization, not only for the manufacturer but also for the whole system.

Keywords: Invoice tokenization, FinTech, blockchain, payables finance, multitier supply chain, supply disruption, sourcing strategy