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ANZ and Westpac have announced that their trial with IBM and shopping centre operator Scentre Group has resulted in the successful digitisation of the bank guarantee process used for commercial property leasing.
Bank guarantees — unconditional and independent undertakings by a bank, on behalf of its customer, to pay a named beneficiary in the event the customer fails to fulfil their contractual obligations with that beneficiary — have historically been paper-based documents that are susceptible to loss and fraud.
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As some landlords receive hundreds of guarantees a month, it was hoped that by digitising the files would free up storage space too.
Mark Bloom, chief financial officer at Scentre Group, said that the 11,500 retailers who use guarantees to support rental obligations need to manually track these documents, which can be “been an extremely cumbersome and labour intensive process”.
He added that an “update of the decades-old process for issuing, tracking and claiming on guarantees [was therefore] long overdue”.
Trial details
The trial involved the use of Distributed Ledger Technology (DLT) at the Scentre Group (which owns and operates Westfield in Australia and New Zealand) to eliminate the need for current paper-based bank guarantee documents, in the hopes of driving standardisation, increasing efficiency for the three primary parties involved: tenants, landlords and banks, and reducing the potential of fraud.
The trial took place over April 2017 and involved Hyperledger’s Fabric V1.0 core blockchain technology.
It enabled the three parties to access a “single source of truth” as the parties to the transaction could view the guarantee.
Both the tenant and landlord could request that a guarantee be created or amended, but the ability to action that request was limited to the bank. This ensured that neither tenants nor landlords could illegitimately adjust active guarantees in their favour (e.g. increasing a guarantee amount before claiming, terminating a guarantee before an anticipated claim by the landlord, etc.).
Each party was also notified at each stage of the guarantee’s lifecycle, with the exception of demand payments — where the tenant was only notified once the bank had completed payment to prevent the tenant from “taking action to adversely affect the landlord’s right to claim against the guarantee”.
According to the partners of the trial, such technology could help standardise and improve the current bank guarantee process.
‘Removing the cost of fraud, error and operational risk’
Commenting on the successful trial, Nigel Dobson, general manager of wholesale digital for Digital Banking at ANZ, said: “We have been keen to avoid the hype surrounding blockchain and distributed ledger technologies, and instead focused on practical and deliverable use cases.
“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.”
Andrew McDonald, general manager of corporate and institutional banking at Westpac, added: “This is about removing the cost of fraud, error and operational risk that will continue as long as bank guarantees remain paper-based and manually issued.”
In a bid to “build a shared solution with the rest of the industry”, the banks are now inviting other organisations to participate in a larger pilot.
Mr McDonald commented: “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.”
Dr. Joanna Batstone, vice president and lab director of IBM Research Australia, agreed, adding: “The business-use case demonstrates the opportunity to lift efficiency and transparency for all parties involved. We believe blockchain can potentially drive productivity across all Australian industries."
It is thought that similar technology could help modernise and disrupt similar processes, such as:
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