Bank guarantees: jumping from paper to blockchain

Lygon modernizes the process with IBM Blockchain technology
by Caroline Poser
4-minute read
Melbourne city skyline looking down

The bank guarantee is a pillar of financial systems worldwide. But the traditional process of issuing a bank guarantee is time consuming — and managing it throughout its lifecycle can be fraught with challenges. That’s because, until now, the typical bank guarantee has been a paper-based document.

A bank guarantee is an unconditional promise made by a bank or an insurer to certify that the liabilities of a debtor will be met. Prospective tenants often use guarantees to secure commercial property leases instead of cash deposits or rental bonds. They are also used for financial transactions across multiple industries to secure contracts.

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.

The guarantee process is prone to fraud because paper documents are prone to forgery. Additionally, it’s costly and it’s very hard to monitor. 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. For end customers, the process is cumbersome, and each delay means they are not open for business that much longer.

Retailers relying on paper guarantees

11,500

in Australia and New Zealand

Time to create a guarantee

1 day

reduced from 30 days

To better serve our customers, we wanted to deliver a guarantee solution that was contemporary, digital and that could be used in a multi-bank setting.
Nigel Dobson
Banking Services Lead, Australia New Zealand Banking Group Limited; Chairman, Lygon 1B Pvt Ltd.

Furthermore, whenever rates change or a lease needs to be renewed, the bank must issue a new guarantee, negotiating each change in what can be a painfully laborious process. Banks, landlords and tenants didn’t want to be passing paperwork back and forth amongst themselves for weeks, and they demanded a workflow that made sense to all parties involved.

Nigel Dobson, Banking Services Lead at the Australia New Zealand Banking Group (ANZ) and Chairman of Lygon 1B, a consortium of banks and technology companies, says: “There was a genuine need to digitize the archaic process by which tenants, banks and landlords negotiate bank guarantees. We brought together three of Australia’s biggest banks together with a leading property management company to address these problems and disrupt the industry.

“To better serve our customers, we wanted to deliver a guarantee solution that was contemporary, digital and that could be used in a multi-bank setting,” continues Dobson.

pile of papers on a work table
Digital rendering of a handshake with blockchain code
Teaming with IBM was a very easy decision. We had an enterprise use case, and we needed a bank-grade solution — the kind we believed IBM would deliver.
Nigel Dobson
Banking Services Lead, Australia New Zealand Banking Group Limited; Chairman, Lygon 1B Pvt Ltd.
From POC to live pilot
Teaming with IBM was a very easy decision. We had an enterprise use case, and we needed a bank-grade solution — the kind we believed IBM would deliver.
Nigel Dobson
Banking Services Lead, Australia New Zealand Banking Group Limited; Chairman, Lygon 1B Pvt Ltd.

In 2017, ANZ approached IBM® Research with a number of business processes it wanted to digitize, one of which was the process around bank guarantees.

Together, the bank and the research team identified blockchain as a key component in a potential solution that could transform the guarantee lifecycle — including issuance, amendments, cancellations and any claims — for all organizations involved.

“We decided that we’d do a proof-of-concept (POC) project to prove that we could digitize the bank guarantee process. Blockchain was something that I’d been passionate about,” says Dobson, “and we were looking for a genuine and unique cross-industry use case. This was it.

“Teaming with IBM was a very easy decision. We had an enterprise use case, and we needed a bank-grade solution — the kind we believed IBM would deliver.”

ANZ invited another bank, Westpac, to join the POC. Scentre Group Limited, a shopping center company and a customer of both banks, also agreed to participate. Powered by the IBM Blockchain Platform on IBM Cloud®, the successful POC applied blockchain’s security-rich, transparent and immutable distributed ledger technology (DLT) to standardize and manage bank guarantees.

“One of the great strengths of blockchain in an enterprise setting is around reconciliation of information between multiple parties. It’s not that we don’t trust these parties — we just want to be sure that our systems can communicate perfectly with each other,” says Dobson.

Read the whitepaper with the results of the POC.

In 2019, Commonwealth Bank of Australia (CBA) joined ANZ, Westpac, Scentre Group and a blockchain team from IBM Global Business Services® along with the IBM Research team to form the consortium known as Lygon 1B Pty Ltd.. Together, the companies set out to design and develop a production-grade prototype using live data to create legally binding guarantees for retail property leasing.

Fast forward to June 2020, and executives from the Lygon consortium decided that the solution had commercial merit and engaged with IBM Global Technology Services® to provision and manage a production platform. Lygon is also counting on IBM Security™ Services to help ensure that the platform — which will be delivered as a service — will be designed for high availability and security.

“The commercialization of the Lygon platform represents a significant milestone for blockchain technology in Australia and globally. We’ve gone from a proof of concept to a newly incorporated company and commercially available platform in two years — at a time when the demand for digital has never been stronger,” says Dobson.

Removing friction from the guarantee lifecycle

With the Lygon platform, a tenant can request a guarantee online, a landlord can set the terms and then the tenant and bank can review the guarantee. To satisfy the need for a multilateral solution with data sharing, reconciliation and synchronization, the platform includes DLT based on the Hyperledger Fabric from The Linux Foundation. When all parties agree on the document, it will be stored in the DLT in a standardized, trackable way that is trusted by all parties.

This three-way conversation can happen completely digitally. There is no paper involved. Previously, the time it took to process a bank guarantee — starting with the applicant asking for the guarantee through to completion of the guarantee — took as many as 30 days. Today, the process can be completed in less than one day.

“The friction we’ve removed from the processes is extraordinary,” says Dobson. “From the applicant’s point of view, they’ve saved a month. From the beneficiary’s point of view, they've got a digital instrument that they can manage for its entire lifecycle. And the issuer sits in the middle with the ability to see everything that's going on, with the confidence that it’s fully compliant.

“It’s a win-win-win situation, which is pretty rare. We were delighted that we could actually improve and uplift the experience, the timeline and the outcomes for all three parties.”

The solution will be generally available by the end of 2020 with the expectation that Lygon will onboard a number of guarantee issuers and beneficiaries. Following this, the plan is to pursue expansion into other markets and explore developing additional capabilities in support of related instruments and business processes.

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

In digitizing a bank guarantee, we’ve essentially transformed a three-way contract. We’ve digitized the paperwork, the process and the legality behind it.”

Dobson concludes: “We look at IBM as a terrific partner, not only because of the way in which they dedicated resources and really committed to the project but also because they were just as excited as we were about solving the bank guarantee problem.”

Lygon logo
About Lygon 1B Pty Ltd.

Founded in 2019 in Melbourne, Victoria , Australia, LygonExternal Link is a consortium formed to digitize the bank guarantee process through its Lygon blockchain platform. Members include Australia and New Zealand Banking Group Ltd. (ANZ), Westpac Banking Corp., Commonwealth Bank of Australia, Scentre Group Limited and IBM Australia.

Solution components
Lygon logo
About Lygon 1B Pty Ltd.

Founded in 2019 in Melbourne, Victoria , Australia, LygonExternal Link is a consortium formed to digitize the bank guarantee process through its Lygon blockchain platform. Members include Australia and New Zealand Banking Group Ltd. (ANZ), Westpac Banking Corp., Commonwealth Bank of Australia, Scentre Group Limited and IBM Australia.

Solution components