The Student Loan Blockchain Case of Spuerkeess
Luxembourg-based Spuerkeess announced to issue blockchain-based student loans last year. On May 5, 2022, Christophe Medinger, Deputy Head of Business Unity Digitalisation, proudly shared that 80% of the student loans they issue are blockchain-based today. The students are not aware that they are actually using blockchain technology. They only see a QR code to scan and a much faster process than before.
Spuerkeess is a government-owned bank with retail, private, institutional and corporate banking. In retail banking, they are the largest bank in Luxembourg, and recently they were voted “Luxembourg Bank of the Year” by The Banker.
Why student loans?
Many students enjoy student loans in Luxembourg. Issuing them is cumbersome and fraud sensitive. A student receives a yellow paper with a watermark from the government, which they bring to the bank, saying they got a loan approval. The bank will then transfer the money to the student account.
Banks send a periodic consolidated report to the government; there is no real-time connection between banks and the government to authenticate these papers. Often these papers were falsified, people would withdraw the money, and before the fraud was detected, the money was gone.
In 2016-2017, the IT department of Spuerkeess started investigating the potentially valuable use case for blockchain technology. That is when they realised that the loopholes in this loan process could be avoided by transforming it using blockchain technology. Blockchain technology is used as digital proof that the loan is authentic, it identifies the student and the amount to be paid.
Christophe: “We need to prove that this letter is authentic at some point in time. Blockchain was the right technology to get the same level of assurance (or higher) as you have today.”
The new process still starts with a paper but with a QR code this time. This QR code contains a unique hash with the required information of the student and the money they were granted. If the student is a client at Spuerkeess, they can scan the QR code with a new functionality in the banking app. Once the blockchain transaction is validated in the back-end, students can have the money on their account within 30 seconds.
There is one exception, explained Christophe: “Today, it only works for the second, third, fourth loan. When you study in Luxembourg, you get a loan every semester. So if you study for five years, you get ten loans. We still require for the first loan you come to the bank.” That way, they have the KYC process covered.
Key advantages of using blockchain
The obvious key advantage of using blockchain technology in this specific case is that fraud can be reduced to near zero. Because the QR code is the key to a unique hash, papers can no longer simply be copied. On top of that, there is real-time authentication.
Paper archiving is no longer required, nor is the periodic reporting to the government. The process is much more efficient, both for the bank and the government.
Christophe: “Blockchain technology is very useful. When we described this use case to management and the policies, and we showed the number of resources they can spare, through process optimisation, suddenly it became a very sexy topic for management.”
Having all the nodes on the blockchain also means that students can scan and validate QR codes when the government is offline. Although the bank may not transfer the money until the transactions are validated, students will still get their money much faster than before, and they don’t need to go to a branch.
The process is completely anonymous. Once compliance understood that it is impossible to trace a salted hash back to personal information, they realised that there were no data protection issues, resulting in a much more efficient process.
Students get their money much faster in the new process, and they don’t need the paper anymore if they would redeem the money at Spuerkeess.
When someone in the audience asked about the ecological footprint, Christophe explained that because it is a private blockchain, with proof of authority by the government, the project doesn’t suffer from heavy energy supply, as Bitcoin consumption does. Even if more banks would join, the setup for a centralised blockchain network makes sense. The ecological footprint could be reduced to near zero.
The first obvious next step is to digitise the process completely, also loan number one, for which students still need to go to the branch today.
The second is an industry-wide implementation. All Luxembourgish banks will be required to implement this process by September 2023. From that moment on, the government will only send a pdf with a QR code to students, and they will stop printing the 30.000 letters per semester.
Of course, both the Luxembourgish government and Spuerkeess are looking for new use cases where blockchain technology could disrupt the existing process.
At The Banking Scene, we will follow up on these trends closely, and if something new shows up, you’ll hear it in The Banking Scene Afterwork 😉.