In a trial with shopping centre landlord Scentre Group, Westpac and ANZ have developed a blockchain solution to digitise a financing process used for commercial property leasing.
The prototype, built on IBM’s distributed ledger technology, eliminates the need for current paper-based bank guarantee documents, resulting in a single source of information with reduced potential for fraud and increased efficiency.
Bank guarantees are a bank’s unconditional undertaking to pay one party in the event of another’s default. It allows the retailer to secure a lease in lieu of a cash deposit or rental bond, while giving landlords have the assurance they’ll get paid if the tenant defaults.
The guarantee typically takes the form of a letter which becomes the single source of truth and its enforceability is cemented by the business frameworks and processes that have been built around it.
A shared ledger would allow all three parties (tenant, bank and landlord) to more efficiently manage the guarantee process.
“We have been keen to avoid the hype surrounding blockchain and distributed ledger technologies, and instead focused on practical and deliverable use cases,” said Nigel Dobson, General Manager Wholesale Digital, Digital Banking at ANZ.
“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.”
In addition to eliminating the need for physical document management, the trial also addressed other inefficiencies in the current bank guarantee process, including the challenges in tracking and reporting of a guarantee’s status through multiple changes.
The banks plan to build a shared solution with the rest of the industry, and to invite other organisations to participate in a larger pilot.
Mark Bloom, Chief Financial Officer at Scentre Group, said the update of the decades-old process for issuing, tracking and claiming on guarantees is long overdue.
“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 labour intensive process,” Bloom said.
Andrew McDonald, General Manager Corporate and Institutional Banking at Westpac, said the digital process removes the cost of fraud, error and operational risk which accompanies the paper-based manual process.
“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,” McDonald said.
This blockchain trial used Distributed Ledger Technology (DLT) powered by Hyperledger Fabric V1.0 – a blockchain framework and one of the Hyperledger projects hosted by The Linux Foundation.
The stakeholders involved in the trial have today released a whitepaper detailing how the solution worked and how it could be used in other situations that rely on bank guarantees.