GENEVA -- While the majority of treasury departments are still figuring out how blockchain technology might fit into their future plans—if they are thinking about it at all—Microsoft is taking the initiative.
Tuesday at Sibos 2016, Microsoft announced that it has partnered with Bank of America Merrill Lynch on a blockchain solution for trade finance transacting. Microsoft’s treasury department will essentially be serving as the guinea pigs, establishing the first blockchain transactions between a major corporate treasury function and a financial institution.
Marley Gray, principle architect program manager at Microsoft Azure Blockchain Engineering, started Microsoft’s Blockchain-as-a-Service in 2015. The project quickly caught the attention from the treasury department, who was very interested in the innovative distributed ledger technology. “We taught them about blockchain and what it could do, and gave them some hands-on experience,” he told AFP.
Eventually, Gray’s team sat down with treasury and asked them about some pain points that blockchain might be able to address. “We settled on standby letter of credit (SLOC). We wanted to pick a use case that has business value and isn’t just blockchain for blockchain’s sake, and also one that proved what we assumed was the true value of the blockchain network.”
Gray added that SLOC was just one of many pain points that Microsoft’s treasury group believes blockchain could help it solve. “Our treasury department is very forward-leaning; they’re fast adopters of new technologies,” he explained. That would put Microsoft treasury at odds with most treasury departments, who are typically much more conservative when it comes to adopting new technologies.
Gray’s team began by taking a deep dive into treasury’s standard process for getting a SLOC when one is needed. “So we went through and documented and we found that it takes about five business days to get one,” he said. “There’s roughly about 14 to 15 steps involved in that process, and of those steps, there’s about a 50 percent error rate with your data. That leads to a lot of manual reconciliation—phone calls, faxes, emails, etc. It’s just a mess to try and reconcile that so it can be measured between one to two people per counterparty, with a cost estimate per letter of credit of anywhere from $1,500 to $15,000.”
This often painful process for treasury is often just between four counterparties—Microsoft, its bank (BofA), the customer and the customer’s bank. If more counterparties are involved, it could be even more of a headache.
“So we built the system, and we wanted to track its key performance indicators—how long it takes, how many steps, what it costs, human error rate, etc.,” Gray said. “We got it down to minutes instead of days. We got it down to four steps, we got both the error rate and the human involvement down to zero, and we got the cost down to pennies on the dollar. It’s very seamless the way it operates.”
Microsoft then took things a step further and added another counterparty to see what would happen. “That top line—the steps, the error rate, etc.—all of those numbers go up when you add counterparties,” Gray said. “But the blockchain cost line stays flat. So that tells us that the value of the network increases exponentially by the number of participants in that network. Everyone benefits from the lowering of that cost, freeing up capital and speeding up business. So that’s what we proved in the proof-of-concept—it does have business value.”
Gray told AFP that a full pilot for the program is slated for 2017, once more of Microsoft’s customers and their banks are enrolled. From there, Microsoft will likely begin looking at additional pain points blockchain could address for treasury, like other areas of trade finance and derivatives.As for treasury departments who are reluctant to explore the potential of blockchain, Gray believes the onus is really more on their banking partners to offer them the services. “They need to say ‘Hey, you can use this network and get this much response time and it’s going to cost you this much less, or you can go this other way and it’s going to cost you more,” he said. “Eventually, that’s going to work itself out. More and more treasuries are going to see more competition between these banks. That value has to be provided by the banks to the treasurers in different areas. There will be better visibility into what your positions are, what your risk exposure is, and near real-time treasury data—that’s often very hard to get.”