Photo of Peter Jameson, Bank of America Merrill Lynch, Henry Byrne and Jayna Bundy, Microsoft.
We have heard much talk of late about blockchain and distributed ledger technology and here is a company which has conducted a successful proof of concept (POC) for standby letter of credit (SBLC) issuance and advising.
Director of Treasury Operations
Treasury Manager – Trade Finance
Director – Treasury
Principal Program Manager
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Proof that a concept can become reality with blockchain
The inspiration for this solution was born out of solving a practical business challenge: Microsoft was expanding sales to new client segments and markets, requiring payment assurance through standby letters of credit (SBLCs). The legacy processes took days, sometimes weeks, in many instances to issue and advise an SBLC, delaying fulfilment, revenue, and impacting customer relationships.
The bank welcomed the opportunity to partner with a world-class corporate, working hand-in-hand with the treasury team to document each pain point, opportunity, and how blockchain/smart contracts can potentially streamline processes.
In September 2016, Microsoft and Bank of America Merrill Lynch conducted a successful proof of concept (POC) for SBLC issuance and advise using blockchain/smart contracts via Microsoft Azure’s Blockchain as a service (BaaS). At the time, this was the first Azure-based blockchain transaction between a major corporate treasury unit and financial institution. Microsoft provided the blockchain and related technology, and is the corporate treasury “user,” acting as beneficiary of the SBLC.
The objective was to demonstrate that blockchain/smart contracts could streamline the inherently paper-based and inefficient SBLC process by digitising the transaction, and making it available to all parties near real-time in the cloud.
As Jayna Bundy, Director of Treasury Operations explains, “The POC was successful in validating the potential benefits, while also framing the requirements on the journey from proof of concept to pilot, to eventually commercialising blockchain for trade transacting.”
Best practice and innovation
A trade finance application has been built that runs on a cloud framework in a very seamless manner. In essence, the POC followed the same process as a traditional SBLC. The key difference is the largely shortened transaction time and effort involved, as well as the increased transparency by all parties to the smart contract at each stage in the SBLC lifecycle. Historically, this process took days or weeks to achieve, was highly paper-intensive and error prone. Now, all the details are easily accessible in the blockchain ledger and closing the end-to-end SBLC transaction takes a matter of hours, instead of days.
Equally important, treasurers can see all of their exposures in a single glance on screen offering a one-stop-shop that provides holistic visibility for all their SBLC credit decisions and exposures to-date.
Bundy concludes, “This POC is one example of the sustained commitment to collaborate and drive innovation and digitisation. It is a key step in the journey to leverage emerging technology to simplify and improve how companies transact trade.”
- Process efficiency.
- Traceability – blockchain creates an electronic stamp that cannot be removed, producing an immutable record.
- Platform – facilitating adoption for corporates and banks of all sizes and capabilities, through an “already-in-place” technical infrastructure and reduced technical work required by leveraging the Azure cloud blockchain as a service platform.
- Security – blockchain creates unique, permanent IDs for documentation, which ensures authenticity, enhancing the current, bi-lateral paper process, including multiple emails, attachments, and other non-standard communications.
- Cost benefits – reducing costs for all parties due to near real-time collaboration which decreases latency and eliminates iterative, paper-based processes. The implementation could result in as much as an 80% reduction in hours spent managing the current manual processes.
- Buyer/seller benefits:
- For SBLC beneficiaries (sellers):
- Grow and accelerate revenue and improve customer relationships by shipping sooner, and building customer relationships, versus managing transaction status and physical paper.
- More efficiently manage risk by instantly seeing the status of all SBLCs.
- For SBLC applicants. Receive goods and services more quickly and predictably. Both reduce costs through automation and streamlining of processing, reducing up to 50% in transaction re-work through greater transparency adoption.