Leading Australian banks ANZ and Westpac have concluded a successful trial where blockchain technology was used to digitize the issuance of bank guarantees in the commercial property leasing sector.
The duo teamed up with IBM as well as shopping centre operator Scentre Group in order to test the technology. The involved parties have also published a detailed white paper explaining how the technology works.
A guarantee is a physical document that represents a bank’s commitment to paying one party in the event that the other party defaults on its payment. These useful documents are used across a wide array of sectors like in the trading of goods and services, financial transactions, industrial projects, the development of property, or the leasing of assets.
In the commercial property market, bank guarantees are preferred by both the landlords and the tenants since there are benefits on both ends. Tenants are able to acquire property leases using a guarantee instead of a rental bond or a cash deposit, which allows for enhanced financial flexibility while the landlord is assured of rental income without having to deal with the administrative burdens related to the management of cash deposits.
Though guarantees are essential documents, they come with several challenges due to their physical nature. Guarantees require a high level of safekeeping since they are prone to damage as they are typically in the form of letters. For landlords with many tenants, storing these documents soon becomes a logistical challenge. There is also a lack of standardization as different banks use different verification methods before issuing the guarantees. The tracking of guarantees is a great challenge as well.
The Chief Financial Officer at Scentre Group, Mark Bloom, explains that the processes related to the issuing, tracking and claiming of guarantees are in need of an update to better meet the needs of all parties involved as well as keep up with current technology.
“With approximately 11,500 retailers across Australia and New Zealand who use guarantees to support rental obligations, manual tracking of guarantees has been an extremely cumbersome and labor intensive process,” Bloom adds.
Blockchain technology can be used to remedy all these shortcomings, as is stated in the whitepaper. “In an ecosystem where three parties (i.e. the tenant, the bank, and the landlord) participate in the creation, management, and expiry of a common instrument, a blockchain solution could provide the optimal medium for facilitating the necessary flow of information, while balancing the competing needs of transparency and confidentiality.”
The ANC and Westpac Trial
The two banks, in conjunction with IBM, were able to achieve success with the use of blockchain technology to replace physical guarantees as well as to digitize other related processes such as tracking and secure storage.
The trial utilized a distributed ledger technology (DLT) framework that is powered by Hyperledger Fabric V1.0 hosted by The Linux Foundation.
The Vice President and Lab Director of IBM Research Australia, Dr Joanna Batstone, said, “Using an agile approach, IBM collaborated with ANZ to combine the bank’s deep knowledge of the industry and their partners, with IBM’s blockchain expertise.”
The trial concluded that:
“The solution explored in this [proof of concept] has the potential to shift the issuance of bank guarantees from a manual, paper-based model into the digital era, and in doing so, lift efficiency for all parties involved.”
Speaking of the successful trial, the General Manager of Wholesale Digital, Digital Banking at ANZ, Nigel Dobson, said, “We have been keen to avoid the hype surrounding blockchain and distributed ledger technologies, and instead focused on practical and deliverable use cases.This proof of concept demonstrates how we can collaborate with our partners to develop a digital solution for customers, which also has the potential for industry-wide adoption.”
With regard to safekeeping, DLT would enable for the issuance of a digital guarantee that would mitigate the storage challenge. “At the point where a paper guarantee would typically be issued (i.e. following completion of relevant bank credit reviews and approvals), the bank would instead create a new entry on the shared ledger representing the newly issued digital guarantee.”
This is a clear advantage as is explained by the General Manager Corporate and Institutional Banking at Westpac, Andrew McDonald. “This is about removing the cost of fraud, error and operational risk that will continue as long as bank guarantees remain paper-based and manually issued,” he stated.
The whitepaper also detailed how the use of the tech could result in standardization of the guarantee issuance process. “As a medium for sharing information and facilitating process flows, blockchains encourage the identification of commonality between network participants. In our POC, key opportunities for industry standardization revolved around: the terms and format of a bank guarantee; and the process flow for guaranteed issuance, amendment, demands, and cancellations.”
Lastly, the trial concluded that DLT could be used to solve problems associated with the tracking process because the digital guarantee would be visible as well as easily verifiable by the involved parties. “One of the key benefits of a blockchain solution is its ability to provide a single source of truth across multiple parties.”
IBM, Westpac, and ANZ believe the technology can be adapted to perform in all industries that require guarantees. IBM’s Batstone explained:
“The business use case demonstrates the opportunity to lift efficiency and transparency for all parties involved. We believe blockchain can potentially drive productivity across all Australian industries.”
This is why the team has released a detailed white paper, as part of an effort to encourage other industry players to take advantage of the technology. “Next steps involve encouraging all industry players to adopt this technology so we can better protect and save money for our customers. Beyond that there is no reason why this couldn’t be applied across other industries,” added Westpac’s McDonald.
This use of blockchain technology to mitigate challenges in the commercial property market showcases the versatility of the technology as well as signals growing support and trust in the potential of distributed ledger technology to perform at high levels.