How Distributed Ledger Technology Can Enhance Financial Services

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Distributed ledger technology (DLT) is a novel system that offers banks a unique way to transact securely on a shared database without intermediaries. It enables them to sync data over a distributed network.

As per a report by 360 Market Updates, “Blockchain Distributed Ledger Technology (DLT) Market,”

Blockchain Distributed Ledger Technology (DLT)

The tech helps cut or reduce time-consuming and error-prone processes that harmonize diverse contributions to the ledger.

What is DLT?

KPMG defines DLT as :

DLT is a digital system for recording the transaction of assets that uses cryptography to store information securely and immutably in multiple places simultaneously.

Here are the efficiencies of DLT that help enhance financial services:

1. Offers Greater Auditability

All network members have a complete copy of the encrypted distributed ledger. They can only make revisions when consensus is established across the entire network in real-time.

This method, combined with little or no involvement of a central authority, minimizes fraud and diminishes reconciliation costs.

2. Efficient Decentralization, Automation and Programmability

DLT streamlines the digital value or tokens transfer between two counterparties, enabling decentralized record keeping. It cuts the need for an intermediary or central authority controlling the ledger.

Smart contracts can be made in traditional centralized ledger systems. Therefore, centralized ledger systems’ design must be implemented after the concerned parties have agreed to the underlying transaction recorded in the central system, which is time-consuming. But, in a DLT, the counterparties are involved after completing the transaction.

3. Accelerates Payments

Sending or receiving money is costly as it involves multiple parties, intermediaries, banks, and many financial systems. This means that international payments can take up to three days. DLT can help banks boost their clearance and settlement mechanisms.

By utilizing DLT, banks can eliminate the need for any intermediary. They can process and initiate international transfers that benefit them and their customers. Hence, DLT in financial services improves financial access and equity.

4. Boosts Financial Inclusion

Tech built on DLT offers cheap and scalable solutions with adequate data transparency, safety, and accuracy, bolstering financial inclusion.

Also, DLT lowers transaction costs to provide efficient financial services, making banking attractive to those who have been underserved. Minimal fees enable banks to expand their operations to locations and customer cohorts to provide better services.

5. Safe and Easy Data Sharing 

DLT stores customer data on decentralized blocks. It eliminates duplicative efforts and makes it easier and safer to share data between banks in real-time.

6. Easy Lending and Credit Provision

Banks and lenders have underwritten loans using a system of credit checking and reporting. While this involves specialized credit agencies, the process is complex and time-consuming. This can frustrate customers who urgently require funds.

DLT makes digital lending more economical, efficient, and secure. It can also facilitate practical and safe means of peer-to-peer lending.

7. Faster Clearance and Settlements

Clearance and settlement mechanisms are unmanageable, slow, and costly. Also, multiple intermediaries and financial messages are involved. With so many parties and messages, it can take up to three days to settle.

Using DLT, banks could prevent the need for intermediaries and allow them to clear and settle cost-effectively as soon as a payment is made.

8. Ensures Transparency in Trade Finance

Trade finance facilitates transactions between buyers and sellers, revolutionizing international commerce by offering credit, payment guarantees, and insurance that is beneficial for all parties.

This traditional and paper-intensive process involves several parties and takes time. DLT enhances transaction transparency and boosts automation in trade finance. This cuts costs and errors and accelerates document delivery to customers.

This way, banks can increase efficiency and generate revenue by making trade finance more transparent and accessible to customers globally.

Why are Banks Hesitant to Adopt DLTs?

A report by Broadridge,” DLT in The Real World 2023 Survey Key Findings,” states that firms consider DLT as 50% less relevant to their businesses than last year.

For banks, transitioning from complex and embedded legacy systems onto DLT infrastructure is complex and expensive. Some are still working with legacy tech stacks that hinder the implementation of DLT. Many perceive DLT as another manifestation of the legacy challenge, while some fear being disintermediated by DLT.

Although it eliminates risks, it introduces a new risk based on counterparty issuance. Each trading relationship involving a new Blockchain requires its own ‘token’ with tailored credit risk. Also, creating multiple alternative ledgers causes fragmentation in the existing ecosystem due to a lack of interoperability.

More importantly, some versions of the tech are highly energy-consumptive and may not adhere to the ESG agenda.

Banks must understand that DLT is a modern tech that helps refine financial operations. Moreover, the challenge is more than just the tech. Its success requires innovative approaches to how software is designed, developed, deployed, and managed.

Also Read: Best Ways Banks Can Benefit from Blockchain Technology

Conclusion

Banks must understand that distributed ledger is a disruptive tech. Hence, determining its applications and use cases will help banks extend their services beyond the organization and its partners. This helps establish a network of peers, providers, third parties, and regulators. Moreover, DLT lets banks offer robust financial services to unique customer cohorts effectively.

The tech helps banks become immune to cyber-attacks since all the data is stored across a secured network. Interestingly, banks incorporate the Blockchain-based DLT by defining their Proof of Concept (PoC). This will provide them with first-hand experience of use cases relevant to the organization.

Apoorva Kasam
Apoorva Kasam
Apoorva Kasam is a Global News Correspondent with TalkCMO. She has done her master's in Bioinformatics and has 18 months of experience in clinical and preclinical data management. She is a content-writing enthusiast, and this is her first stint writing articles on business technology. She specializes in marketing technology, data-driven marketing. Her ideal and digestible writing style displays the current trends, efficiencies, challenges, and relevant mitigation strategies businesses can look forward to. She is looking forward to exploring more technology insights in-depth.

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