blockchain AS AN INNOVATION DRIVER FOR banking
Exciting use cases for blockchain in banking
Blockchain is a hot topic – and more than just a buzzword. Innovative applications and high interest are currently developing in almost every industry. Why should top decision makers in banking deal with the opportunities of blockchain and its potential for disruption? In the following, we inspire you with three use cases of the blockchain that provide a high benefit in banking. With our EARLY BRANDS real-time scouting, we keep pace with the times, recognize global innovation and technology developments very early.
This EARLY BRANDS innovation spotlight doesn’t focus on the prominent blockchain use cases like digital currencies such as Bitcoin, or ripple for international cross-currency payments. We show three other blockchain use cases and innovative projects that bankers should know: from syndicated loans, promissory note placements, to trade finance, the blockchain technology offers a high potential for innovation and disruption in banking.
USE CASE # 1 – BLOCKCHAIN-BASED SYNDICATED LOANS
Syndicated lending – this is the granting of a single loan by at least two financial institutions to borrowers. The processing is complex, with many participants involved and high administrative effort. Multiple agents, borrowers and hundreds of lenders need to coordinate and exchange information repeatedly. Countless faxes, e-mails and telephone calls accompany this process – agents spend about 70% of their time on administrative activities. At the same time, it is difficult for the players to keep track.
This makes the financial instrument a hot use case for the blockchain technology: new digital solutions based on the blockchain help to reduce the administrative burden on syndicated loans. At the same time, the process becomes more transparent and secure. Through a private-blockchain trading platform, for example: it bundles all information and makes it accessible to the verified actors in real-time. Secure against the loss or falsification of sensitive data. The result: Syndicated loans are processed faster and safer. The bank’s employees, lenders and borrowers are pleased. And the bank is strengthening its competitiveness through efficiency gains in the double-digit percentage range.
There are already exciting projects out there: Finastra’s blockchain-based online marketplace Fusion LenderComm for syndicated loans was launched in 2018, after a successful pilot phase with several banks. On the one hand, the platform enables credit officers to securely publish their data and share it in real-time. On the other hand, many lenders can view the automatically consolidated data and their balance sheet items, in real-time. This saves time and money, also because the obligatory requests from lenders disappear. Another project is BBVA’s digital financing platform: it completed a first real-life transaction for a blockchain-based syndicated loan at the end of 2018. The entire processing of the syndicated loan amounting to EUR 150 million was coordinated via the private blockchain network. Agile and with maximum transparency for all parties involved. The individual negotiation steps up to the agreement of the loan contract were documented in a secure, unchangeable way on the blockchain.
USE CASE # 2 – PROMISSORY NOTES FRESHLY THOUGHT
The situation is similar with promissory note placements. The process is highly standardized but involves many manual activities during negotiations and the exchange of hundreds of documents with multiple parties. The existing inefficiencies offer attractive opportunities through innovative, digital solutions. One example and pioneer project: the promissory note platform VC Trade. It digitally maps the entire process. Most of the manual administrative activities and communication steps are eliminated. This makes the handling of promissory notes much easier for the arranging banks, issuers, investors, lawyers and rating agencies. And ensures an overall shorter processing time. With significantly reduced costs. Example: Together with Commerzbank, Helaba has transacted a promissory note worth EUR 700 million for the automotive supplier Faurecia via the VC Trade platform. Compared to the standard promissory note, about 40% of the costs were saved. The focus of VC Trade is currently on the digitalization of the promissory note process itself. For regulatory reasons, it is open to the advantages of the blockchain technology but does not emphasize them now. Through self-executing digital contracts, i.e. smart contracts, integrated into the blockchain different activities like transaction of payment tranches are automated. And faster, safer than ever.
For example, LBBW demonstrated the opportunities of the blockchain through promissory note placements for Daimler and Telefónica. Because of regulatory reasons, these placements also were conducted in a conventional way at the same time. Nevertheless, such projects have strong signal effects and show the innovation potential of blockchain for banking. Another example: Erste Group’s permissioned blockchain platform issued the first pure blockchain-based promissory note for the motorway operator Asfinag. Further projects like DEBTVISION show the disruptive power of the blockchain technology for banking: the digital promissory marketplace and subsidiary of the Stuttgart Stock Exchange and LBBW has the potential to “replace” the arranging banks as intermediaries in the promissory note placement. The blockchain platform brings together borrowers and potential investors. And it regulates and oversees the full process. Safe and fully automated. As a digital trust for all involved actors. Of course, this does not just apply to promissory notes or syndicated loans…
USE CASE # 3 – CHANGING TRADE FINANCE
Trust also plays a major role in trading transactions. Letters of credit serve as a payment method for trading transactions with the greatest possible security for sellers and buyers. But they are time-consuming and costly. The main reason for this: Trade finance is still based on a lot of paperwork with a high administrative overhead. Documents such as shipping documents, invoices etc. are processed, documented and exchanged between the actors manually. The result: It takes five to ten days to complete a transaction that funds export goods. In the case of blockchain-based trading, the identities of the trading partners are clear, the documents are transparent, counterfeit-proof and administrative activities automated. Trade transactions take only a few hours. The transaction is automatically carried out via smart contracts when the goods arrive at the recipient. At the same time, the blockchain ensures for the seller that the money is transferred once the trade route is completed. Everything without the intervention of third parties. Already possible today.
Some examples: HSBC, ING and six other banks have launched Voltron to digitalize global trade finance based on the blockchain platform. All finance and trade documents are exchanged quickly and securely between the parties. First transactions via the platform illustrate the benefits: the transaction processing of Cargill’s trade of soybeans from Argentina to Malaysia or polymers from India to Peru took only one hour instead of a week. We.trade and Batavia are two other innovative projects. Both rely on IBM’s Blockchain Platform and have been developed closely with multiple banks. First trading transactions for cars from Germany to Spain or raw materials from Austria to Spain were carried out faster and more secure. At the same time, smart contracts automatically triggered the transactions as soon as specified steps in the supply chain were met. The information is then automatically visible for the exporter, importer and the arranging bank, safe and in real-time.
The blockchain revolution in banking is well underway – in the sense of practice-relevant projects that add value to banking institutions and their clients. Already today, we realize innovative business models and services with the blockchain technology. Jointly with leading companies. And in close cooperation with strong startups and tech partners. We recommend dealing with the topic early – and getting to know the individual opportunities for your company at an early stage, testing them and gaining experience with the exciting blockchain technology. Think banking new together with us and keep your finger on the pulse of the times…
Catch the Future…!