Electronic communication is fast and convenient for banks and their customers. However, new regulations require communications to be immutable and provably durable. How could KIR satisfy the demands of both groups?
KIR created its ‘durable medium’ blockchain solution based on the Hyperledger Fabric to help banks comply with EU regulations, while ensuring convenient access for consumers.
Enablesfast, convenient and highly secure exchanges of information
Cutsup to USD 2.6 million in costs associated with traditional paper-based communication (per bank)
Helpsbanks to comply with new banking regulations
Business challenge story
In recent years, consumers have grown accustomed to many products and services being available at the touch of a button, with the minimum of administrative friction. This is increasingly the case in personal banking, where many functions can be managed via web or mobile applications.
This digital transformation has gradually shifted from a welcome bonus afforded by technological advances to something consumers expect as standard from a service provider. For many banking customers, visiting a bricks-and-mortar bank branch seems inconvenient and old-fashioned compared with, for example, making payments on a smartphone.
While banking on a mobile device is easier for customers, it also brings advantages for banks. By providing services online, banks can economize on branch operations and cut further significant costs thanks to the ongoing reduction in cash transactions. There are also significant savings in the wider economy as banks and retailers move away from physically managing and transporting cash.
However, in the EU, this growing consumer demand for remote services has been accompanied by increased regulatory pressures on banking security.
Key among these pressures is the ‘durable medium’ principle stipulated by EU financial services regulations. This requires banks to be able to send information to clients on a medium that can be addressed directly to the recipient; that the recipient can store; and that the recipient can reproduce unmodified. The clearest way to achieve this is through postal delivery of paper documents, but this is a slow and costly process.
Polish banks, operating in one of the largest banking sectors in Central and Eastern Europe, were seeking a way to combine the convenience of electronic communication with the surety of paper documents. Robert Trętowski, Vice President of the Managing Board, Krajowa Izba Rozliczeniowa (KIR), Poland’s national clearing house, begins: “At KIR, we help ensure regulatory compliance, promote good practice and seek to help with the digitization of Poland’s banking sector.
“The most important commodity for any bank is trust in its services. We knew it was important to enable customers to manage their accounts remotely, while still maintaining security. We also wanted to help banks save money by reducing the amount of paper documents they send to customers regarding their accounts. Working with the banks, we were seeking to identify a common solution for the entire industry and resolve these twin pressures on the sector.”
Banking on blockchain
KIR decided to implement a blockchain solution to meet banking customers’ demands for convenience in dealing with their documents, while also fulfilling regulators’ ‘durable medium’ security requirements. The organization chose as the basis for its platform the Hyperledger Fabric 1.1 framework from the Linux Foundation and an electronic stamp tool that it developed itself.
Robert Trętowski explains: “The advantages of using a blockchain solution lie in its inherent non-repudiation, transparency, credibility, and security. The use of blockchain technology simplifies services, improves processes, and supports trusted business relationships.”
KIR’s durable medium blockchain solution acts as a secure database for banks and their customers that is not controlled by any single party. The platform provides a proof-of-existence service that enables users to register and verify documents through timestamped operations stored on a distributed ledger. This ensures that every exchange of information receives an electronic timestamp and a unique cryptographic signature, which means that any subsequent changes to the information entered are immediately visible to the relevant users of the blockchain. This means that the entire lifecycle of documents issued and exchanged by banks and their clients can be traced and audited by all parties with access to the blockchain platform.
Using KIR’s blockchain solution is easy. The process begins when a bank sends a customer a document containing information relevant to them, together with a link to a special page on the KIR website. The customer opens the link and drags the document onto the webpage. The solution then verifies that the document complies with durable medium regulations, seals it electronically and provides it with a time stamp. The stamped document is then certified to be an accurate copy, and can be used – for example – in legal proceedings. The entire process takes only a few minutes, does not require a log in and does not store sensitive customer data in the system. Currently, only public information (such as banking regulations and pricing lists) is available in the blockchain platform, but KIR plans to include private documents (such as contracts and account statements) in the next development phase.
KIR chose to work with IBM Global Business Services® in Poland to develop its durable medium blockchain because of IBM’s long expertise with the global financial services sector, and in using blockchain platforms in real-life business situations. Robert Trętowski continues: “Our reputation is based on trust, and to maintain this, we always seek to work with partners who have similar integrity and values. IBM’s commitment to developing the use of blockchain, and their vast global experience of designing and implementing complex projects for the financial services sector were key factors to partner with them on this initiative.”
KIR worked in close collaboration with IBM Blockchain Services to develop a proof-of-concept for the durable medium blockchain platform. Tests demonstrated the platform’s high performance, including the capacity in one second to publish 370 documents; verify 549 documents; and download 2,439 documents.
Following these positive test results, in September 2018 KIR launched the durable medium blockchain for use by one of Poland’s largest domestic retail banks and is close to completing implementation at another.
Clearing a path to success
The durable medium blockchain is set to be a significant development for KIR and the Polish banking sector. It will enable the clearing house to cut costs and save time for Polish banks, provide fast, convenient and remotely available services and information for their customers, and help ensure compliance with durable medium laws and other security-related regulation.
Robert Trętowski notes: “Developing a solution that solves the issue posed by durable medium regulation is clearly in the interests of both banks and their customers. KIR’s platform guarantees the integrity of data with its blockchain technology, which prevents any interference with the stored documents. The service is also completely consistent with the GDPR regulation, as non-public data is stored in KIR’s digital repository and can be deleted at the customer's request.
“We are confident that using the KIR blockchain solution will cut costs significantly for Polish banks. For a large bank, notifying all customers about their transactions via post can cost over ten million zlotys (around 2.6 million dollars) each time. By eliminating this cost at a stroke, our blockchain solution will free up a significant amount of cash for the banks to use on further internal investment and innovation.”
The durable medium blockchain will also unlock major time savings for banks and their customers – delivering documents via post is a slow process. KIR’s platform effectively automates the process while preserving the immutability of a paper-based approach, making trusted information available quickly and conveniently to all parties
KIR’s blockchain solution also helps to safeguard consumers against any changes to terms and conditions, even after a customer has ended their contract with a given bank. The platform’s distributed ledger technology enables customers to see immediately any amendments or developments to any entry in the blockchain, ensuring total transparency for all parties.
With the solution already live with one major Polish bank and soon to be launched at another, KIR expects soon to reach a critical mass of banks using its blockchain solution. Robert Trętowski concludes: “Our objective is to enable all banks operating in Poland to use a solution that is optimal from their point of view – we want to align our offer with the changing world and preferences of our clients.
“This project would not have succeeded without the hard work and dedication of the experienced blockchain architects and consultants at IBM Global Business Services in Poland. KIR has the opportunity to take advantage of the knowledge and extensive experience of IBM, while IBM can participate in a groundbreaking project for a major European market. Together, we are creating a new chapter in the history of Polish banking.”
KIR is the national clearing house of Poland, and a key part of the Polish banking and payments infrastructure. The organization provides complex clearing services and top-quality solutions to meet the needs and expectations of the country’s banking and payment sectors.
KIR promotes the use of innovative technologies to grow the offerings of financial services providers. The organization works to increase Poland’s level of digitization and has been supporting the development of cashless and electronic processes in the economy for the past 25 years.