Cows in a field

Cash cows - how blockchain is transforming trade finance

01 November 2016

Barclays was a key player in the first global trade transaction using blockchain technology. We look behind the deal and get a glimpse of the future.

A farmer bringing milk and butter to market represents one of the oldest trades in the world. From Roman senators sourcing fine cheeses in Gaul to the island nation of the Seychelles importing tonnes of butter from Ireland, the trade in dairy products has been one of the basics of civilization.

But there was something different about that last trade from Ireland to the Indian Ocean nation – a deal facilitated by Barclays. A blockchain-based letter of credit closed a transaction between Ornua (formerly the Irish Dairy Board) and the Seychelles Trading Company, guaranteeing the export of almost US$100,000 worth of cheese and butter.

The deal – the world’s first blockchain-based global trade transaction – is the latest milestone in Barclays’ pioneering mission to harness a technology that promises to transform trade finance over the coming decade, cutting time and expense from the process.

US start-up Wave, one of many blockchain companies Barclays is developing ideas with, went through the bank’s 2015 New York Accelerator programme, before Barclays swiftly brought their blockchain-based product from concept to reality – culminating in its use in the groundbreaking Ornua-Seychelles trade.

The new platform helps optimise internal processes for banks and reduces the risk of documentary fraud, but the key cost efficiency is in speeding up the time it takes to complete a trade transaction – from as many as 20 days, to just a few hours.

Baihas Baghdadi, Barclays’ Global Head of Trade and Working Capital, explains: “In the best case scenario, the trade finance process for this type of deal takes seven or eight days – when you’ve gone through loading the goods, issuing your invoices, dealing with your home bank, getting those recommendations checked, sending the paperwork to Africa and getting it endorsed by the importing bank. In the worst case scenario, it can take 20 days. Since all this is physical, it’s really difficult to accelerate that process.

“With this new process, it can be done in under four hours. That means a lot. As an exporter, you will know that you have a confirmed payable within the same day. And then, if you need an advance, we can give you the money right away. That is a massive facilitator – not only for the importers and exporters but also for the banks, which can make the funds available on the same day.”

Transformational tech

Shona Tatchell, Head of Innovation within Baghdadi’s department, describes the effect of blockchain technology on trade finance as “transformational”.

She says that her department has been aware of the potential applications for the technology for 18 months, when Barclays started working with Wave. Gadi Ruschin, CEO at Wave, said: “Effective use of blockchain technology can have a huge impact on the future of trade. By adopting our system, trade can be done more easily and more cheaply. There is a significant opportunity to improve this element of the trading process.”

Baghdadi sees further benefits in the future. “Using blockchain for internal transactions within Barclays definitely brings benefits, with processing efficiencies and savings because of more efficient timings, improved documentation control, courier savings and so on. But the real value of this solution will come on the industry adoption of it.”

Considering how long it will take other banks to catch up and help facilitate this trade, Baghdadi anticipates that the process could be driven by industry bodies: “In my conversations with different banks, there is a massive will for a lot of banks to join us. We want to select early adopters, dedicate energy and resources to them, and prove the validity of the concept. Then, we’d go to industry bodies and government agencies worldwide to take this forward. We have to keep in mind that this is not only about banks, but also importers, exporters, shipping and insurance companies coming together.”

Tatchell thinks the timescale for blockchain becoming a dominant force will be accelerated by input from governments and regulators: “It’s difficult to predict the timelines, because it depends on level of take-up and how all of us make it easier for everyone to understand the benefits of this technology. The big push will come from regulators – when they fully understand the benefits that come from this through transparency, efficiency and cost savings.”

Beating the Brexit paper-chain

“Think of the logistics ahead with Brexit and how we can reduce the mountains of paper that will be flowing from that,” says Tatchell. “Beyond regulators, we see part of our role as educating the industry. We say to all banks, ‘come and talk to us and we can share the experiences we’ve been through in understanding this tech. It makes sense for Barclays to work with partners outside the bank’s network to show how the trades can work across institutions.”

Looking at the Ornua trade as a flag-bearer, Tatchell says: “Now that people have seen that this can work in the real world and it’s not just theoretical, I think the level of take-up will start to gather pace.”

As a longstanding client with a high level of trust, Tatchell says that Ornua was very willing to come on board. The company is set to conduct further blockchain deals, while the World Economic Forum forecasts that blockchain will become the ‘beating heart’ of the global financial system within five years, finding that $1.4bn has been invested in the technology over the past three years.

What we’ve done with Barclays has surprised the industry

Gadi Ruschin

CEO of Wave

Since graduating from the Barclays Accelerator programme, Wave has worked with the bank in developing new solutions for trade finance.

The start-up’s blockchain-based technology connects all members of a supply chain to a decentralised network, allowing them direct exchange of documents.

The company’s founder, Gadi Ruschin, describes blockchain as “a very good solution to eliminate pain in international trade” and recognises “an increasingly positive dialogue” about blockchain solutions across the banking industry.

“No one expected a live pilot to happen so fast,” he says of the ground-breaking link-up with Barclays. “We pulled together the product very quickly. Barclays is very curious and wants to work with start-ups, but actually signing the contract and acting upon it has surprised the industry.”

Latest news