Could high tech financial transparency help cross-border deals?
Blockchain system helps UK companies confirm the creditworthiness of overseas customers and suppliers, and guarantees payments and deliveries
In Glenmuir’s Lanark office, a display cabinet groans with memorabilia about the company’s founder Andrew MacDougall, a well-respected employer of local people. Established in 1891, Glenmuir is one of the great British heritage brands, and much loved by golfers around the world who snap up its jumpers, polo shirts and other golfwear, all embroidered in Lanark.
The family business supplied the Ryder Cup teams for nearly three decades and remains the official retail partner of the biennial event. “There is a great cachet associated with a British product backed by 130 years of heritage,” says Mikhel Ruia, Glenmuir’s managing director.
But doing business abroad can be a hassle: every time Glenmuir finds a new supplier, for example, it needs a pledge from its bank, HSBC, to guarantee the company’s creditworthiness, before the order can be accepted. “This letter of credit takes time and effort,” says Ruia. Across the UK, small businesses report the same story and feel it hinders international expansion.
Thanks to IBM, however, things are getting easier. In May, Glenmuir joined we.trade, a new service that uses smart contracts on IBM Blockchain to automate many of the verification and transaction checks that would otherwise take weeks or months. This gives the customers of 12 European banks a path to frictionless cross-border trading.
“These are self-executing contracts, triggered by the efficient exchange of digital information. They allow you to stipulate any number of conditions – including the timing of a payment or the timeliness of a delivery – before payment. The result is cheaper and faster than traditional letters of credit for documentary trade.”
Ciaran McGowan
“Small companies can’t depend on domestic trade; they need to open up new markets, which is time-consuming and expensive,” says Ciaran McGowan, general manager of we.trade. And high fees for services can eat into companies’ slender profit margins. “Now the verification process can happen immediately through this live online record,” says Ruia. He is already seeing the impact: the company has shaved a month off the three-month process of filling large new orders, meaning the company can be more responsive.
“If it’s a hot summer and people want more polo shirts, we have to be able to supply them. In this era of fast fashion, independent companies like ours have to react quickly.”
“The concept of the smart contract is revolutionising the assurance of payments,” says McGowan. “These are self-executing contracts, triggered by the efficient exchange of digital information. They allow you to stipulate any number of conditions – including the timing of a payment or the timeliness of a delivery – before payment. The result is cheaper and faster than traditional letters of credit for documentary trade.”
We.trade is helping manage the complex supply chain with which Glenmuir serves its international market, says Ruia. “In January we’ll need lambswool jumpers in Sweden or Scotland, but in Australia customers will want lightweight shirts and jackets. We need the right products at the right time in the right market.”
We.trade is also helping Glenmuir do business more ethically. It has always been committed to treating staff and suppliers fairly – the Lanark display cabinet includes a letter from founder MacDougall to an employee who’s off sick, wishing him well and enclosing “some dainties that might help you recover your strength”.
Today, Ruia makes several visits a year to suppliers’ factories to check on employment practices and the fair sourcing of components, such as buttons, but he can’t always know what’s going on. Blockchain-enabled smart contracts allow all participants in the process to enter information about their contribution or the materials they are supplying.
With the help of IBM’s other blockchain based services, we.trade will soon support the tracking and tracing of goods in the supply chain, as well as the collecting of information on the provenance of goods and services. One day, the process could even allow an individual knitter to confirm that she is on a fair working contract.
All this will help Glenmuir share information about the provenance of its goods, to demonstrate its commitment to ethical policy and chart the journey of a garment from grower to customer.
“I will be able to ship garments with QR codes on them so customers can see where the yarn came from, where it was spun and who supplied the buttons. The lambswool and merino wool is from Australia, gets spun into yarn in Huddersfield, is knitted in eastern Europe, comes back to Lanark to be finished, then might be sent to Seoul’s plush Gangnam neighbourhood. It’s amazing to see the journey,” says Ruia.
Glenmuir is also discovering how blockchain can make doing business abroad safer. Fiona Barclay, Glenmuir’s financial director, says: “I was concerned about whether we.trade would be secure. If we were putting our bank details and those of our partners out there, I didn’t want to open up a new portal to cybercrime. You hear so many tales of companies rolling out a new IT system that is immediately hacked.”
In fact, because the blockchain can’t be updated without the permission of all participants – and because no information can be deleted – the technology is more secure than existing systems. “The data encryption, distributed control and consensus decisions in blockchain technology mean that the platform is secure,” says Ian Tandy, head of trade and receivables finance at HSBC UK.
We.trade may even help smooth the way for banks to open the funding tap to small businesses, reversing the drought this sector has faced since the financial crisis.
“After 2008, the banks were under pressure not to introduce further risks, yet governments were in pursuit of GDP growth and needed small and medium sized businesses to thrive,” says Parm Sangha, IBM’s global head of trade and trade finance blockchain services.
“After 2008, the banks were under pressure not to introduce further risks, yet governments were in pursuit of GDP growth and needed small and medium sized businesses to thrive.”
Parm Sangha
“Thanks to IBM Blockchain, banks can now begin to offer customers services that previously cost more than they could afford.” He explains that the new system supports credit checks and verification of clients – and their international customers or partners – more quickly.
It also gives banks greater visibility of a client’s business, and as the network expands with IBM – it plans to roll out to Hong Kong, Singapore, India, Africa and Latin America – it will provide a larger customer pool. “In time, it will let banks see much more about a client’s business, helping them to offer better services at a better price,” says McGowan.
That’s the sort of heritage Glenmuir would value.
off to a flying start...
Beeswift manufactures protective equipment – including workwear, high-vis clothing, and head and eye protection – at its base in the West Midlands, where it employs 138 people. With the business well established in the UK and the company’s reputation now turning heads abroad, foreign sales are booming – growing 79 per cent over the past two years.
The recent growth has come despite long delays in establishing whether new customers, typically wholesalers who sell on the clothes and equipment, can be trusted to pay.
“In the UK you can easily get a measure of new customers using a credit check,” says Beeswift financial controller Tom Sadler, from the company’s West Bromwich base. “Abroad, the process of finding recommendations and references is far more difficult.” Giving new overseas customers the same 45-day payment period as UK customers means taking a big risk, but requiring them to pay upfront can mean they go elsewhere.
The traditional solution – a letter of credit in which the customer’s bank guarantees the payment – means legal costs and long delays. Between the agreement being struck and the letter of credit being in place, stock for an order piles up in the factory, incurring big storage costs.
We.trade solves the problem for Beeswift in a single click. When a customer is a we.trade member, its bank will guarantee the payment automatically, meaning the credit risk is totally removed from Beeswift. “If we give them 45 days, we know that the bank will pay us at the end of the period regardless. All of the risk is taken from us and put on to the bank,” says Sadler.
We.trade has also saved relationships with slower payers. Previously, those who routinely exceed their 45 days would often have been abandoned, recalls Sadler. “Now we have the security we need to carry on dealing with them.”
IBM believes in world-changing progress
IBM is transforming global trade. With IBM Blockchain, trust is being introduced to the trade corridors around the world via our partnerships with Trade Finance service providers like we.trade. Globally connecting these local Trade Finance networks, IBM aims to profoundly change trade and the movement of goods, documents and funds by lowering costs and reducing risks while offering greater transparency and trust.
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