[The Editors' Verdict] Fintech Supply Chain Finance Preparing for the Post-COVID Era

The novel coronavirus disease (COVID-19) situation, which now appears to have entered a genuine stabilization phase, has lasted for over two months and has shocked all industries, but it has dealt particularly severe blows to small business owners and self-employed individuals due to sluggish consumption. According to the government, requests for financial support have reached 150,000 over about a month. The government has implemented financial support amounting to 4.6 trillion won through policy financial institutions and private financial companies, and plans to provide additional support to small business owners by preparing an emergency supplementary budget.

Including such emergency situations, small business owners mainly resolve financial issues through banks, but borrowing is not easy due to income instability, lack of financial information, and insufficient collateral. Moreover, liquidity products or unsecured loans available to them have high discount rates and loan interest rates due to high management costs. In particular, it often takes more than a month for small business owners to collect payments after supplying goods and services, and during that time, they sometimes have to halt production due to lack of working capital.

To address these issues, so-called supply chain finance has emerged. This is financing that provides working capital more quickly to suppliers during the production or supply process of goods or services. It is a type of advance payment service where cash is prepaid using accounts receivable as collateral. Traditionally, electronic bill discounting and accounts receivable secured loans have been used to facilitate fund transactions between large corporations and their suppliers, but recently, supply chain finance utilizing new fintech (finance + technology) such as peer-to-peer (P2P) platforms or big data analysis has been activated. Supply chain finance is also called platform finance because it connects suppliers who want to convert accounts receivable into cash, i.e., receive advance payments, with fund providers who want to invest in the discount rate of accounts receivable. It uses non-financial information such as sales records and seller reputations held by platforms like e-commerce companies and card companies to newly evaluate the creditworthiness of small business owners who lack collateral or guarantees and link them to funding. For example, Woori Bank, SK Telecom, and 11st have formed a partnership and plan to launch supply chain finance products using SK Telecom’s non-financial data on small business owners who are online market sellers. In this way, supply chain finance has the advantage of faithfully adhering to market principles by quickly supplying funds based on fintech companies’ credit evaluation systems rather than government-led initiatives.

Essential requirements for such supply chain finance include enabling various platforms, including non-financial companies, to perform credit evaluation tasks using non-financial and unstructured data, and allowing the opening and sharing of data for credit evaluation. The government also recognizes this necessity and is promoting the activation of supply chain finance. First, a regulatory sandbox is being operated to allow non-financial companies to conduct credit evaluation using non-financial and unstructured data, and from August, the Credit Information Act will be amended to legalize this. The amended law also expands data sharing by permitting the use of pseudonymized information and information disclosed by credit information subjects on social network services (SNS) either directly or through third parties without consent. Furthermore, the 'Online Investment-Linked Finance Business Act and User Protection Act,' which specifies the legal basis and requirements for P2P finance previously regulated as lending business, has been enacted to clarify the platform’s status and role. The lessons learned in the financial sector due to COVID-19 include the re-recognition of the importance of fintech-based non-face-to-face transactions that we have been striving for and the need to prepare various support measures for small business owners vulnerable to crises. It is hoped that supply chain finance will establish itself as an innovative inclusive finance case by performing a sustainable support function for small business owners based on market principles.

Seong-Yeop Lee, Professor, Graduate School of Technology Management, Korea University · Deputy Director, Cyber Law Center

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