The advent of Distributed Ledger Technology has greatly contributed to the efficient operation of several sectors, especially the financial sector. DLT, or Distributed Ledger Technology, involves a consensual sharing and synchronization of data across a network that is typically spread across several institutions, geographies or sites.
What Can DLT Do for Correspondent Banking?
DLT minimizes the risk of cyber-attacks through decentralization and by allowing all participants access to an identical copy of the shared data. Due to this quality, banks across the globe are investing heavily in distributed ledger technology as a way of boosting operational efficiency and cutting down on the costs of minimizing operational risks. Correspondent Banking is one of the areas that is set to be greatly improved by the introduction of DLT in the financial services industry.
Since correspondent banking involves a bank providing services on behalf of another bank, data sharing is vital for the seamless operations of both facilities. Therefore, for correspondent banking to succeed, there needs to be a data sharing system that allows both banks access to important data. The distributed ledger technology has proven to be an efficient platform for data sharing between not only banks but other institutions as well.
Two major benefits of DLT that contribute to the improvement of correspondent banking are as follows:
Decentralization of Data
One of the notable features of distributed ledger technology is the decentralization it provides. All the members of a specific network are provided with a single and holistic view and access to data. The access is neither managed nor controlled by any entity as the general idea behind the technology is to eliminate the need of an intermediary or middleman. It is thus, more or less, a peer-to-peer network in which all the participants are on a level field, and each has an equal opportunity to transact.
The decentralization of access to information is quite constructive in correspondent banking. For instance, by creating a peer-to-peer data-sharing platform, both institutions have access to the same information at the same level. This, in turn, makes it easier for both institutions to keep track of the financial records without the need to request for or send data. The transactions registered on the shared ledger are first hand, a fact that ensures the integrity and security of the data.
Distributed Ledgers are designed to be immutable and this is achieved by keeping all updates iterative. This means that when there is an update made on the ledger, the changes are appended to previous versions instead of replacing them.
Additionally, there are also consensus mechanisms that have to be satisfied before these iterations are made. Through immutability, the levels of security that can be achieved in correspondent banking is peerless. Past transactions cannot be updated unless the consensus of the network is met. This enforces transparency for regulatory functions or reporting.
Besides the two benefits, DLT is also a robust and secure technology for data sharing and synchronization offering simplicity and affordability to users. Recently, the European Banking Authority (EBA) devoted 13 whole pages of its Fintech report “Report on Prudential Risks and Opportunities Arising for Institutions from Fintech” (PDF) to assessing potential use cases in banking for “distributed ledger technology.”
The report presented quite a positive picture for the relationship between distributed ledgers and banking citing that trade finance is “currently grounded on paper-based contracts travelling around the world with settlements that may take weeks, resulting in a rather inefficient process.”
All the above mentioned features of DLT are not only necessary for the efficiency of Correspondent Banking but also make Distributed Ledger Technology one of the best avenues for the success of Correspondent Banking.
About TerraPay: TerraPay is the world’s first mobile payments switch – a B2B transaction processing, clearing and settlement service for mobile wallets. Our best-in-class technology serves as the interoperability engine that enables our partners’ customers to send and receive real-time transactions across diverse payment instruments, platforms and regions.