Blockchain optimizes the settlement of Schuldscheinen
The blockchain not only makes the settlement of Schuldschein note loans significantly easier and faster, but also offers more process security, cost transparency and more options for investors and companies. The first pilot transactions have now been processed on private blockchains.
The Schuldschein note loan (SSD) has become much more important for corporate financing in recent years. Around EUR 28 billion was placed in 2019 by means of 160 transactions in promissory note loans. In addition to these growing financial markets, a number of new digital platforms have been created in recent months that offer digital services for the processes involved in issuing the Schuldscheindarlehen.
“All processes for Schuldschein note loans can be digitized,” says Christoph Steinbrich, Managing Director of DEBTVISION GmbH. ” The platform approach has proven itself for marketing and for the subsequent processing the blockchain offers a lot of convincing added value”.
In the traditional Schuldschein business there are still numerous manual or inefficient processes and interfaces between borrower, arranger and investors. So far, some initiatives have experimented with different platform solutions. Among other things, blockchain technology is to be used for processing a Schuldscheindarlehen.
Complete digitalization without media breaks
The financial instrument Schuldscheindarlehen holds great potential for simplifying and accelerating processes through digitization. Particularly in the settlement phase, many time-consuming and manual processes are involved, such as data entry, printing out the borrower’s note on paper, sending the documents by post, confirming transactions by post.
In a first phase, the digitalisation of Schuldscheindarlehen was limited to the front-end area or the marketing of the financial instrument. At that time, the actual processing of the Schuldschein note and thus the entire backend process was still done manually. In the meantime, the entire settlement – excluding payment transactions – can be mapped in a blockchain.
“Payment transactions cannot be digitalized at the moment,” says Steinbrich. “Although the leading central banks around the world are working on this topic, digital currencies will only be available in the medium to long term. Then the payment or interest could be made within seconds via a blockchain.
In addition to efficient settlement, the blockchain now also enables forgery-proof documentation of the processes, including notarization by means of an electronic signature. Transactions can be posted automatically and irrevocably on so-called decentralized account books (distributed ledgers). In principle, transactions of this kind even make a bank or notary public obsolete. The first examples of pilot transactions on private blockchains are currently available, respectively from DEBTVISION with LBBW as the main shareholder and finledger. The financial institutions behind finledger are DekaBank, dwpbank, DZ BANK and Helaba.
“The participants also benefit from a verified validity of the Schuldschein, in that, for example, any changes have to be confirmed by the other participants and thus any manipulation can be ruled out,” emphasises Markus Neukirch, Board Member for IT and Operations, dwpbank. “In addition, the system is interoperable with a front office platform and can be expanded at any time to meet future requirements”.
Digital platforms and blockchain
In these pilot projects, the Schuldscheindarlehn was processed decentrally via a blockchain-based platform. This means that the Schuldschein is processed securely and transparently with the help of a digital network without a central control unit – from data entry to the creation of the certificates. Each of the four actors operates a node, i.e. a point within the network that provides access to the platform and where data can be created, transmitted or received.
“A hash value is created for each Schuldschein,” explains Thorsten Braun, Group Manager Operations, OTC Derivatives & Schuldscheindarlehen, DZ BANK. “With an electronic Schuldschein, the parties involved can call up the current status of the note at any time – 24 hours a day, seven days a week. Loss of documents or data during the process is basically impossible”.
For the actors of a Schuldschein loan, the blockchain has many advantages: Due to the efficient processes, the overall costs are reduced. These savings can then be passed on to the issuers (debtors), thus reducing their financing costs. In addition, the digital platform allows more investors and issuers to be addressed in a more targeted manner in a shorter period of time, which in turn leads to an increase in the issue volume.
While eligible issuers are usually subject to a credit assessment, investors are usually willing to buy a low-risk Schuldschein note loan as soon as they enter the platform. The digital transfer of records and documentation accelerates the overall process. Once a document has been issued, it can be viewed immediately by all participants and can also be digitally invalidated in the event of a buyback. This represents an immense gain in efficiency for the back office.
“In the case of a Schuldschein, about four weeks must be estimated for the marketing process,” says Steinbrich. “In the conventional procedure, the subsequent processing takes about seven to eight working days – with the blockchain only three to four days.
As a result, digital Schuldscheindarlehen can be issued for a minimum of 10 million euros without any upper limit. Conventional Schuldscheindarlehen usually range between EUR 50 and 500 million. “The platform is arousing interest above all among customers who trade many Schuldscheine”, emphasises Markus Neukirch, Board Member for IT and Operations, dwpbank. “For these customers, this results in particularly high efficiency gains. Irrespective of this, customers want to know what is behind finledger and why leading banks in the Schuldscheine business have joined forces for this purpose”.
Different approaches to digitalisation
There are three different business models for digital mapping for Schuldscheindarlehen: The first model is a digital platform operated by banks themselves. There is no integration of specialised FinTechs. The second model provides for a digital platform operated exclusively by FinTechs without the involvement of banks. For this business model, the technology companies want to offer the banks’ value-added process at more efficient conditions.
The third model is based on cooperation between FinTechs and banks. The processes are to become digital, cost-saving and more efficient. The banks’ networks will be strategically integrated in order to attract as many investors as possible to the companies. Although the banks play an important role as advisors and confidence builders and in the process as door openers to investors, it is still open whether the digital promissory note will work with or without intermediaries such as notaries or rating agencies.
The article was published in German on Blockchain Insider.
