Cognitive Enterprise

Bank guarantees: Jumping from paper to blockchain

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Author: Nigel Dobson, Banking Services Lead at the Australia New Zealand Banking Group and Chairman of Lygon 1B.

Nigel DobsonThere is a genuine need to digitise the archaic process by which tenants, banks and landlords negotiate bank guarantees. When a retailer wants to lease a property to open a store, the landlord requires a bank guarantee that says, “You’re good for the rent.” To date, this process has been primarily paper-dependent.

Today, some 11,500 retailers in Australia and New Zealand rely on paper guarantees that are created through a manual workflow. This makes issuing guarantees a tedious back-and-forth process.

Paper documents are prone to forgery. Landlords need to manage and store the guarantees, usually in fireproof safes, and manually reconcile them against property leases. And banks lose sight of the document the second it’s issued. And for end customers, the process is cumbersome, and each delay means they are not open for business that much longer.

 Blockchain powers an all-digital workflow

To solve this age-old problem, there’s a transformational solution backed by Lygon 1B, a fintech consortium comprised of ANZ, Westpac, Commonwealth Bank, IBM Australia, and property management firm Scentre Group. Working with a multidisciplinary team from IBM Services, Lygon developed a cloud-based blockchain platform that manages the end-to-end guarantee process with speed, security and transparency.

The platform features a digital workflow, standardised terms and the security to resist fraud. With all functions in one place and immutable data transparent to all parties, the platform makes it easier to do business. The speed is exceptional. In a pilot project with live customer data, what used to take up to a month took less than a day—that’s a 90-95% improvement.

We expect similar results when we go into production in late 2020. Powered by the IBM public cloud, the platform is designed to scale to more than 50 banks and 280,000 guarantees.

Taking advantage of collaborative synergy

The beauty of the Lygon consortium is that our solution goes beyond what we could have achieved on our own. Take the banking part of the platform. Most corporate landlords receive a confusing array of guarantees from multiple banks that differ in their terms and formats. Because Lygon includes three major banks, as well as a firm representing the landlords, we collaborated to standardise terms and processes. The advantages are so compelling that other banks and landlords are eager to join us.

As we discussed the need for a multilateral solution with data sharing, reconciliation and synchronisation, IBM recommended distributed ledger technology based on the Hyperledger Fabric from The Linux Foundation. Since ANZ Bank and IBM are both founding members, it seemed like a smart choice and has proved to be so. Blockchain enables us to manage digital guarantees as smart contracts.

Extending Lygon to new markets and geographies

Another benefit of digging deep into a problem is that it suggests similar problems you might solve. Our platform will benefit retailers with rental bonds, but it can support all types of bank guarantees and therefore benefit the wider community.

Geographic expansion beyond Australia and New Zealand also shows promise. The guarantee process is similar almost everywhere. If we can agree on a standard, digitise the document and put it on a blockchain, we can create a global opportunity.

Lygon was formed to bring a centuries-old paper-based process into the 21st century, enabling multiple parties to collaborate in a straightforward way. I believe we’ve created a simple, elegant digital solution that’s exactly what our customers need.

Want to learn more about solutions for banking and financial markets?

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