Bank guarantees go digital

The banks have finally jumped on the Bank Guarantee blockchain bandwagon. Initially in Australia, banks focused on the retail market where tenants are required to produce Bank Guarantees for landlords. Today some banks are exploring the possibilities of digitising Bank Guarantees for the commercial market.

Retail market

There has been for many years the need to update the outdated system whereby landlords, tenants, and banks negotiate bank guarantees. These bank guarantees assure the landlord that their prospective tenant “is good for the rent”.

In September 2020, In New Zealand and Australia, there were roughly 11,500 retailers who relied on paper guarantees. This obviously created a large workload for the bank staff, as it was all done manually and ensured the process is tedious and lengthy.

To alleviate this problem, a fintech consortium, Lygon 1B was formed consisting of such banks as Westpac, Commonwealth Bank of Australia, and ANZ. Other members of the consortium consisted of Scentre Group, (a property management company) and IBM Services. 

The end result was a cloud based blockchain managing the start to finish guarantee process, with amazing speed, transparency, and security. The receipt of guarantees by landlords used to take up to one month, today it takes less than a day. Scentre Group, together with the cooperation of the banks, standardised the bank guarantees, so landlords when receiving bank guarantees from different banks, all have the same verbiage.

Commercial market

In February of this year, Lygon went on to say that their technology can be applied to different forms of Bank Guarantees, such as performance bonds. However, in 2018 Standard Chartered Bank announced a pilot scheme that will create smart bank guarantees utilising an end-to-end blockchain and smart contracts, which will fully digitise the bank guarantee process.

Away from Bank Guarantees, in India 15 banks have joint-ventured to form the Indian bank’s Blockchain Infrastructure Co Pvt Ltd which will process inland Letters of Credit. This will increase the speed of transactions and eliminate fraud. It will particularly eliminate the possibility of two letters of credit being issued against one invoice which has been known to happen. The expected time frame for this new technology to be up and running is June 2022.

In other digital markets such as Bitcoin, the blockchain is set up to be totally transparent where everyone is able to view the transactions on the digital ledger. It should be noted that in the Diamond Market, where transactions in the past used to be a bit “fuzzy”, blockchain has brought much needed transparency in the areas of diamond identification and transaction verification. 

Returning to the subject of banks and financial instruments, the blockchain will only allow the participants in the instrument to view all the details of the transaction. Each transaction on the blockchain will take the form of a smart contract.

Is the technological future of banking blockchain?

Historically the banking sector has been somewhat immune to technological mobocracy. However, post 2008, when the world was devastated by the global financial crisis, banks have focused more on technological change.

They hopefully have re-established trust with their clientele and through digitisation provide a more complete, efficient, and transparent service.

In many cases, the introduction of blockchain technology has provided banks with more efficient systems and has accordingly given their clients a much faster settlement service. It will be interesting to see how regulators react to this technology, as there still are some reservations about blockchain and decentralised finance.

It seems obvious that as years pass blockchain will become more and more integrated into the banking world. As each bank becomes more efficient and provides a streamlined faster service to clients, all other banks, who have yet to go digital will be jumping on the blockchain bandwagon.