How to use DLT for reconciliations in banking area?

How to use DLT for reconciliations in banking area?
Distributed ledger technology has captured our attention some time ago as a highly promising solution for the financial sector. Today, we see that there is still a long way to go for this technology to become fully realized as it was intended. But experts believe that DLT in the banking area will change established payment processes and related activities and will raise them a couple of levels higher.

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Several years ago, experts began questioning the existence of banks in the future, due to fierce competition with digital fintech startups and non-financial companies.

But in reality, bright prospects are on the horizon for banks, but only for those that, in the next few years, will be able to accept the revolutionary challenge of two main trends: client-centrism and modern technology. Distributed ledger technology (DLT) is one of them, and in this article, we will explain the challenges of its implementation in banking and possible ways to overcome them.

What is DLT Technology in banking?

As for DLT’s meaning, it is a data storage technology where each action occurs only due to the coordination of actions between nodes on a chain, until the moment of reaching full consensus. The following features are characteristic of such a system:

  • Distribution of data without geographical reference in equivalent copies.
  • A distributed registry maintained by nodes.
  • Complete decentralization or 100% independence of each node.
  • To confirm the correctness of the data, all nodes must come to a consensus.
  • The participants in the system are not united by any other arrangements, except network rules.

Are DLT and Blockchain the same thing?

Historically, the first and most widespread DLT is Blockchain, although over the past few years we have seen analogs – Ethereum, MultiChain, Eris, etc. which have already managed to prove their effectiveness. Thus, each blockchain is a distributed register, but not every distributed register is a blockchain.

Read also: 6 Artificial Intelligence use cases in financial services

Where DLT is used and why

According to Statista, central banks used DLT for:

  • Central bank-issued digital currency
  • Payments
  • Regulatory compliance
  • Ownership records management
  • Identity management
  • Audit trail
  • Personal records management
  • Taxes

Regarding the benefits of distributed ledger technology, it provides a high degree of transparency, fast transactions, and wide automation of processes. In addition, with the help of decentralized records of public transactions, DLT significantly increases security, especially in areas such as payments and credit card transactions.

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Are there Distributed Ledger Technology examples?

More recently, we heard that Italian banks will integrate distributed ledger technology (DLT) into internal processes to expedite settlements. The purpose of implementing the technology directly follows from the advantages that DLT is able to provide - greater transparency, increased confidence, and simplified settlements between contractors.

In February 2019, the Italian House of Representatives approved a bill defining DLT and blockchain, as well as technical criteria that smart contracts must meet in order to be legally binding. Thus, Italian banks gained an excellent opportunity to become more technologically advanced with the approval of the state.

Distributed Ledger implementation challenges

Not everything is simple with distributed ledger and blockchain technology. By introducing this technology into banking processes, some problems are inevitable.

Stubborn legislation

As the Italian example shows, banks can gain the opportunity to implement DLT because the government recognized this technology at a legal level and gave banks permission to use it in their processes. However, at the moment this is perhaps the only example of such an adoption – governments are still afraid of losing their full control due to decentralization. In addition, the introduction of DLT can also mean changes in tax payments, and without clear legislative regulation, this creates even more confusion.

The same goes for banking standards, which should be changed under the influence of the blockchain.

Scalability

Yes, it is believed that DLT operations are much faster. However, here is an example of proving otherwise. Visa processes 1700 transactions per second. In order to do the same with the help of Ethereum, you will need about 15 years. Speed ​​is an inherent disadvantage of DLT, and its integration with blockchain is a serious challenge for developers.

Security issues

Blockchain and DLT have established themselves as the most secure technologies for storing and transmitting data, but history always shows that anything can go wrong. Therefore, in introducing this technology into banking processes, security should be the first priority to justify the level of reliability that users can expect. Plus, it will be necessary to provide a reliable level of protection for user applications, since, according to experts, the biggest threat lies in this external layer.

Read also: Fraud Detection: How to use machine learning in fintech?

Lack of developers

Taking into account the fact that the technology is relatively new, banks that decide to implement this technology in their processes will be forced to go in almost blind. At the moment, the global market is experiencing a shortage of blockchain and DLT developers. Moreover, there are currently no practical insights into what problems will have to be overcome technically.

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Summary

The use of DLT does not mean we will overcome whole risks associated with the payment process, and, of course, this technology still has lots of challenges. Issues with security risks, lack of interoperability with existing processes, data integrity and privacy should be solved in the nearest future to make this technology safer.

But the thing is, DLT is an evolving and promising technology, and we advise you to pay attention to it to become the first one who gets benefit from DLT in the banking sphere.

Therefore, the right first step towards DLT implementation is to consult with distributed ledger technology companies. We, at Archer Software, are ready to help you with this issue, discuss all the challenges you may face, and lead you along the right path!

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