How blockchain is changing the face of digital banking for small business by ending paper guarantees

Three months ago, Lygon launched the world’s first digital bank guarantee using blockchain technology, marking the beginning of the end for the paper-based guarantee which has been the dominant form of contractual surety in the western world for around 200 years.

The launch of Lygon was the first time a bank guarantee had been fully digitised anywhere in the world and the first time blockchain had been used for banking services in a real-world, live setting.

In the simplest of terms, a bank guarantee is a bank’s unconditional undertaking to pay one party in the event of another’s default. Bank guarantees are used in every sector of the economy to secure contracts, be it in the trade of goods and services, financial transactions, mining projects, property leasing, and so on.

Justin Amos, CEO of Lygon

In Australia, right now, it is estimated that there are around 400,000 bank guarantees in circulation – but no one knows for sure because they are stored in boxes, filing cabinets, and safety deposit boxes all over the country.

Paper guarantees need to be managed, stored, and protected for their entire existence—invariably decades.

Retrieving, exchanging, and verifying paper-based guarantees is incredibly laborious, time-consuming, and costly—particularly for the countless small businesses required to provide a guarantee each and every time they want to take out a commercial contract.

The fact that paper bank guarantees can take up to four weeks to arrange has a massive impact on SMEs.

6 million days lost

Take commercial leases as an example.

Research shows that Australian retailers miss out on over six million trading days every year running around arranging bank guarantees for new lease agreements.

Every time there is an amendment or change to the contract, businesses are forced to go through the process again.

By far the most common type of guarantees– and therefore the biggest issue for SMEs – are performance guarantees.

A performance guarantee is essentially a contractor’s promise to complete a specific project on time and to the expected standards, as per the contract.

Tradies are reliant on performance guarantees because they offer an alternative to paying cash deposits, which can cause the business cash-flow problems.

The trade-off, however, is that performance guarantee put tradies at a disadvantage to larger operators that have the financial capacity to pay deposits in cash, and can offer to start work straight away.

All over the country, SMEs are missing out on crucial work to cashed up big business because they are having to contend with an inefficient and antiquated paper-based guarantee process.

Digital guarantees

The launch of the Lygon Arc platform earlier in the year has changed the game by levelling the playing field for SMEs, which are the engine room of the Australian economy.

Bank guarantees on the Lygon Arc platform are 100% digital, allowing a streamlined end-to-end service that reduces the process of obtaining a guarantee in just two easy steps.

This increases the speed of execution from weeks to a matter of minutes – enabling SMEs to provide security and offer to start jobs as quickly as large businesses. SMEs also have the ability to recall security instantly, avoiding working capital issues caused by having money tied up in completed jobs.

When I’m speaking to people about Lyon, I’m often asked why it has taken so long to digitise bank guarantees.

There’s no simple answer, but Lygon Arc is a breakthrough in the use of blockchain technology, which has taken a number of years to mature.

It started in 2016 when Scentre Group, the owner-operator of Westfields, asked ANZ, Commonwealth Bank, NAB, and Westpac to solve the bank guarantee issue—the single biggest pain point they, and their tenants, experience when renting out commercial real estate.

Trust from blockchain

Blockchain provides a trusted system of record for digitised documents, removes the risk of data loss, and allows for the secure settlement of transactions between multiple parties.

Pinpointed as the perfect solution to the paper guarantee problem, the big four banks created Lygon’s blockchain infrastructure, which has been built by IBM over the last four years to deliver bank-grade security.

But it hasn’t stopped there.

Last month, Lygon executed the first digital payment guarantee in place of a cash deposit for the legal firm Piper Alderman.

This is the beginning of the end for the paper guarantee, and in time, as digital guarantees increasingly become the norm, small businesses will finally be operating on a level playing field.