While blockchain technology has the potential to revolutionize financial services, implementation will require a significant shift from proof-of-concepts to production. Daimler AG, manufacturer of Mercedes-Benz, recently announced a move in that direction with a test of the technology and promises of more to come. While banks around the world are showing significant interest in blockchain, expanded interest from and partnerships with their clients are even more promising for the development of the technology.
In partnership with Landesbank Baden-Württemberg (LBBW), Daimler tested a €100 million transaction on a blockchain network, executing the entire issuance of a promissory note loan (in German, a Schuldschein) digitally from origination to repayment. While the firm released few specific details about the test, it did note that the blockchain method was “considerably faster” than the classic method run in parallel for regulatory compliance.
Like other financial transactions, the issuance of a promissory note requires the bank to take a central intermediary role, from forming the agreement with the borrower to marketing the loan to investors. According to a report by German bank NORD/LB, the extensive administration involved can take as long as 14 weeks plus the continued management of interest payments for the life of the loan.
The Centralized Classic Method, Courtesy of Daimler/LBBW
Processing Schedule for Promissory Note Loans
The blockchain method, described in a video released by the firms, connects all parties together on one private, decentralized network. A customer portal allows the various parties to access the network, where they can approve and sign contracts digitally. Decentralization of the blockchain’s stored information means every party has access to the “same information at the same time”. Such transparency decreases risk for investors, while the immutable nature of valid information on the blockchain increases security for all.
The Decentralized Blockchain Method, Courtesy of Daimler/LBBW
When conditions and activity on the network meet certain requirements, self-executing smart contracts automate the process forward. These smart contracts can even check on and respond to the status of a payment. This automation significantly decreases administrative costs, especially for the bank that traditionally takes on the most administration. The blockchain method demonstrates clear advantages to the classic method, increasing the transparency, security and efficiency of the process.
Daimler doesn’t expect to use the technology for the entirety of the 50 to70 promissory notes it issues each year. Instead, the firm notes that blockchain technology could impact how many it issues, allowing for a greater number of smaller transactions. The successful test has also encouraged the firm to continue testing the technology in a variety of use cases such as sales, engineering and payments.
For the financial services industry, interest in blockchain technology from clients, especially large ones like Daimler, will provide further incentive to develop and implement the technology.