Backed by a consortium including ANZ Bank, Westpac, Commonwealth Bank of Australia, IBM and Scentre Group, Lygon is a new digital platform that uses distributed Ledger technology to transform how businesses obtain, manage and transact on bank guarantees end to end.
Today, some 11,500 retailers in Australia and New Zealand rely on paper guarantees that are created through a manual workflow. They are required by tenants in lieu of cash deposits or bonds to secure lease payments on a rental property.
The Lygon platform creates a digital vault instead of a physical vault and turns a fraud prone piece of paper with a signature on it into a highly secure digital financial instrument, enabling corporates to use a single tech platform for the management of all their guarantees.
Once the application data is submitted, the Lygon platform can issue a guarantee in seconds, rather than the up-to-four week’s long process with a paper guarantee.
The idea for the platform came about in 2017 when ANZ and Westpac Bank discussed common feedback from their property customers about the problems of managing physical bank guarantees.
This led to an investigation of how to digitise bank guarantees. The platform needed to meet the needs of small and large corporates. “From an issuer’s perspective, we had to think about it for the mums and dads and the large corporate end of the Australian market,” said Rodolf Salem, then part of Westpac’s lending products division and now Lygon’s chief operating officer.
Engaging with ANZ, IBM, and a common customer in Scentre Group, the inquiry turned to using a distributed ledger.
Lygon needed to overcome four main failings of the physical bank guarantee process.
These were the costs, risks, and delays from physical printing, issuing, exchanging, retrieving, and possibly losing guarantee documents. Then the fraud and operational risk due to manual data input. Also, the tracking and reporting problems as a physical document goes through changes and possible handoffs through its lifecycle. Then finally, the lack of standardisation of conditions between by both issuers and the beneficiary of the guarantee.
Once the list of problems to overcome through digitisation was clear, progress was fast.
“We literally sandboxed it in a 12-week exercise,” said Mr Salem. “We were able to digitise the end-to-end workflow of a bank guarantee and the protocols associated. The project uses the Linux Foundation’s Hyperledger Fabric and the IBM Blockchain Platform. We had continuous customer engagement to test the capabilities we were developing.”
There were significant legal and privacy structures that needed to be baked into the Lygon platform as well as the business procedure coding. “There was a lot of legal work especially when you have a number of large parties involved,” Mr Salem said. “Creating common ground on standardisation was also a tricky process but ultimately very rewarding”.
The problem with the variance in terms and conditions around paper-based bank guarantees is that it creates what Mr Salem calls “legal noise” and extra work for everyone at the validation point of the guarantee.
Getting the big four to agree to standardised terms and conditions in the Lygon guarantee platform was a major win.
“That’s a big win because you eliminate noise for the applicant and you eliminate noise for the issuer’s own legal teams,” said Mr Salem.
Rupert Colchester, lead client partner at IBM said the Lygon platform can deliver major benefits in a post Covid19 era across diverse industries.
“It’s much more than just commercial property guarantees. It’s a fantastic example of innovation to help businesses transform. It will have a material impact on a very broad range of businesses and not just banks.”
While the Lygon platform will launch with ANZ, Westpac and the Commonwealth Bank on board, other banks across Australia and New Zealand are already in talks related to using the platform. Mr Salem said the Lygon platform is now live and open for business with new features and guarantee types that accommodate the needs of corporates in various industries and sectors being rolled out at the end of the calendar year 2020.
This article was produced in partnership with IBM as a member of the InnovationAus Editorial Leadership Council.