FinTech for Supply Chain Operations: Platform Credit Financing

Traditionally, in supply chain management, manufacturers such as
Hewlett-Packard
and
Procter&Gamble
fund their downstream retailers through
trade credit financing
(TCF). Recently, with the advance of FinTech, platforms have also implemented innovative financing schemes called
platform credit financing
(PCF). Both TCF and PCF are risky, which expose the lender to operational risks. Motivated by these real-world practices, we model a three-echelon supply chain in which a capital-constrained retailer, exposed to operational risk, orders from the manufacturer and sells on an online platform. We explore TCF and PCF, and determine the retailer's optimal financing options based on her operational risk and the platform's referral fee for the product category. Our results show that PCF becomes profitable for all three entities when the retailer's operational risk level is high. This result justifies the successful adoption of PCF under a high operational risk scenario where it becomes challenging for the retailer to obtain financing through traditional modes. We also find that TCF may achieve a win-win-win outcome in the presence of a loss-averse lender or in the partial demand fulfillment scenario. To derive more insights and check for the robustness of core findings, we examine several extended cases.