With an eye on faster processing, cost reduction, and tighter security, retail banks are investing in distributed ledger technology (DLT) – a digital system that can record transactions spread across multiple sites, countries, or institutions at the same time without a central administrator or centralized data storage.
As more and more customers expect quick, secure, and convenient services, slow transaction speed continues to frustrate bank executives. The challenge is how to streamline the elaborate intermediary chain, supervision, and reconciliation needed to maintain central databases. Moreover, with the spike in sophisticated cyber-attacks and fraud, banks are being forced to dedicate significant resources to hedge against these threats and to build a more secure network. In parallel, retail banks are working to cut operational expenses while enhancing customer experience through reduced processing time and costs for customers.
Enter DLT, a dexterous architecture that combines shared databases and cryptography and allows several entities to access an immutable digital ledger simultaneously.
A DLT database is held and updated independently by each participant (or node) in an extensive network. Distribution is unique because a central authority does not communicate records to various nodes. Instead, files are independently constructed and held by every node. Each node on the network processes every transaction comes to its conclusions and then votes on those conclusions to ensure majority agreement. Once consensus is reached, the distributed ledger is updated, and all nodes maintain an identical copy of the ledger.
DLT feels your pain
Distributed ledger technology addresses several banking pain-points by providing increased transparency, higher processing speed, robust security, and tamper-proof transactions in real-time.
Since the network certifies the veracity of a transaction recorded in the distributed ledger, the trade is free from intermediaries and tracked throughout its journey via secure nodes on the network that maintain transaction history. DLT also eliminates the costly and time-consuming process of duplicative reconciliation.
Thanks to the cryptographic protection offered by DLT, banks are also exploring use cases in digital identity and Know Your Customer (KYC) by setting up a shared digital utility to record identities.
DLT mitigates industry concerns
Source: Capgemini Financial Services Analysis, 2018, Capgemini Top-10 Technology Trends in Retail Banking 2018.
Global consortia, central banks, and leading international banks are exploring and investing in distributed ledger technology by developing proprietary solutions or by collaborating with FinTech firms that offer DLT solutions.
Finastra, a UK financial services FinTech formed in 2017 through the merger of Misys and D+H, and seven leading banks, has developed a DLT platform for the syndicated lending market. This online marketplace – Fusion LenderComm – displays real-time credit agreements, accrual balances, detailed transaction data and position information taken directly from loan servicing platforms. The service intends to reduce the cost and burden of agent/lender administration by enabling self-service capabilities.
Since early 2017, Royal Bank of Canada (RBC) has experimented with DLT at its Toronto blockchain technology center and is now testing a system for improving the speed of payments, reducing complexity, and cutting costs. RBC also hopes to use blockchain (a type of distributed ledger) to strengthen its rewards and loyalty offers and trade finance capabilities.
Bank of America filed three patents for DLT in 2016 to use the technology for user identification and validation and changes to a user’s identity. The applications suggest the US-based bank is looking to blockchain to validate not only the people who use their network but the data within it as well.
U.S digital payments firm Ripple has signed more than 100 financial services firms to its distributed ledger network, RippleNet. Built on advanced blockchain technology, Ripple provides customers with frictionless transfers and includes big-name clients such as American Express, MoneyGram, Santander, UniCredit, UBS, Standard Chartered, and Western Union. Ripple’s technology is applied primarily to banks’ real-time transaction settlements.
Ripple also is working with 61 Japanese banks on a mobile app that will enable customers to settle cash transfers instantly around the clock. Beta testing was to begin in April, and three of the lenders (SBI Sumishin Net Bank, Suruga Bank, and Resona Bank) aim to roll out the service to customers by the end of 2018.
Although DLT has many relevant use cases, significant hurdles exist such as a lack of standardization, skepticism from regulators and government, the need for interoperability among protocols (Hyperledger Fabric, R3 Corda, and Ethereum as well as with legacy systems), and a governance system for distributed platforms built on DLT.
DLT will transform transaction methods
Once it is more broadly adopted and standardized, distributed ledger technology is expected to significantly transform processes used to confirm transactions, which will reduce the effort and resources required for maintaining and reconciling financial records and will lead to higher accuracy.
DLT adoption and standardization will likely enhance overall transparency in the financial services industry as transaction blocks are accessible to all stakeholders and any change in the existing record will be noticed by all participants. Increased participation will encourage collaboration and more stable systems, overall.
To discuss more about how DLT can help your business, reach out here.
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 Coindesk, “What is a Distributed Ledger?” Nolan Bauerle, https://www.coindesk.com/information/what-is-a-distributed-ledger, accessed April 2018.
 Finextra, “New DLT consortium forms for syndicated lending market,” October 5, 2017, https://www.finextra.com/newsarticle/31153/new-dlt-consortium-forms-for-syndicated-lending-market/execution
 Reuters, “Exclusive: Royal Bank of Canada using blockchain for U.S./Canada payments―executive,” Matt Scuffham, September 27, 2017, https://www.reuters.com/article/us-rbc-blockchain/exclusive-royal-bank-of-canada-using-blockchain-for-u-s-canada-payments-executive-idUSKCN1C237N
 Coin Telegraph, “Bank of America Files Three Patents for Distributed Ledger Technology,” Joshua Althauser, August 1, 2017, https://cointelegraph.com/news/bank-of-america-files-three-patents-for-distributed-ledger-technology
 CNBC, “Start-up Ripple has over 100 clients as mainstream finance warms to blockchain,” Ryan Browne, October 16, 2017, https://www.cnbc.com/2017/10/10/ripple-has-over-100-clients-as-mainstream-finance-warms-to-blockchain.html
 Bloomberg, “Ripple Develops Blockchain Payments App With 61 Japanese Banks,” Gareth Allan and Takako Taniguchi, March 7, 2018, https://www.bloomberg.com/news/articles/2018-03-07/ripple-develops-blockchain-payments-app-with-61-japanese-banks