Digital transformation has changed many industries, and almost all areas of our lives are changing thanks to technological advances. The financial sector has embraced these changes by offering innovative solutions like distributed ledger technologies (DLT) in the banking and financial sectors. The main reasons are to improve customer service and make payments and other transactions faster and more convenient.
What is DLT technology?
DLT is a digital system that was created to record transactions of assets in multiple places with no central data storage. In banking and fintech industries, distributed ledger technology brings various benefits for both internal and external transactions. First, DLT makes payment and data processing processes faster, and it improves data security. And thanks to distributed record logs, fraud, and other insecure risks are more difficult for hackers.
There are three main technologies used in distributed ledgers:
- Distributed data storage that provides a shared data vision
- Cryptography, which ratifies transactions, data on the network, permissions, and identity
- Peer-to-peer networking that connects data in real-time with participants
DLT vs. Blockchain
Blockchain is a type of DLT that includes a block of chains. But not all distributed ledger technologies are blockchain. DLT is a decentralized database managed by several participants. There are not many differences between DLT and blockchain. However, blockchain is a DLT, but with specific features so they both have data that is distributed across the network, offering more transparency. And, they both have different capabilities.
Blockchain’s transactions can be viewed by the public, and this means that anyone can see the transaction history and participate in operations.
Blockchain also uses other technologies in addition to DLT to enable blockchain applications. DLT doesn’t offer public viewing features, restricting those who can access it.
Mobile banking, e-payments, and new ways to apply for credit are key benefits of the FinTech revolution. These things are possible primarily with the help of cryptocurrency and DLT. The emergence of e-currency was inevitable, and it proves that every aspect of the finance sector faces digital transformation. However, both customers and businesses are still afraid of implementing cryptocurrencies in their routine life or business activities.
“Virtual currencies, perhaps most notably Bitcoin, have captured the imagination of some, struck fear among others, and confused the heck out of the rest of us,” according to US Senator Thomas Carper.
The first cryptocurrency ever invented is the well-known Bitcoin. The main idea of Bitcoins was to create an electronic cash system, which uses a peer-to-peer network. This helps to avoid double-spending. And it’s decentralized and has no central authority, according to Satoshi Nakamoto, the inventor of Bitcoins. In simple terms, we get a decentralized digital cash system that brings nothing but benefits to the corporate world.
The International Data Corporation (IDC) produced the Worldwide Semiannual Blockchain Spending Guide which has become the basis for a new estimate of the total amount that will be spent on blockchain solutions. The IDC conducted research which shows that it could be $11.7 billion in 2022.
The largest investments will take place in the US because they deliver approximately 36% of worldwide spending in the forecast. The United States is followed by Western Europe, China, and the Asia/Pacific region (excluding Japan and China).
Where DLT is used
Technological advances have significantly influenced globalization, which opened up the world. This informs business processes l where digitalization spreads across borders of communication. Data sharing always sounds risky, but when it comes to sharing your personal bank details it’s even scarier for many. It’s something we can’t fully rely on, and data protection is in the spotlight.
Are you open to sharing your personal information and letting your bank share it with a third party in order to get you the best financial services such as a loan? In a world where almost all our actions have gone digital, why not share personal financial information?
There are many reasons why banks are willing to implement DLT though because it helps to reduce costs, conduct faster processing, and improve data security.
In recent years, many companies and banks implemented DLT and blockchain in the following areas:
- Payments. The most important change brought by the use of DLT and blockchain is the ease in global payments. Banks can use DLT in their existing bank infrastructure improving operational efficiency.
- Capital markets. DLT helps to support a shared platform reducing the margin pressure thanks to business scalability increases.
- Trade finance and lending. DLT decreases paper to almost zero. In the areas of trade and lending, there are various manual operations and paperwork that can be eliminated. DLT is a secure way to distribute documents online in a fast and convenient way.
Global banks are investing in DLT. Finastra, a UK-based financial services FinTech developed a distributed ledger technology platform in 2017 for the syndicated lending market called Fusion LenderComm. This platform displays credit agreements in real-time using transaction data taken from loan servicing platforms.
Royal Bank of Canada (RBC) was also experimenting with DLT in 2017 and was willing to use blockchain in order to help trade finance and improve loyalty offers.
Another example of DLT being implemented is the US digital payments firm Ripple, which signed over 100 financial services to its DL network RippleNet. This was built on blockchain technology, providing its customers with easy-flowing transactions. RippleNet clients include companies like Santander, American Express, and UBS.
Challenges of DLT implementation
Even though DLT is a solution in demand by banks and the financial sector, there are some challenges.
First, it’s difficult to find skilled developers. Blockchain is new so the demand for experienced developers is high. There is also a lack of scalability, interoperability, difficulties in the integration with legacy systems, and other issues. In terms of scalability, DLT networks speed up transactions, but transaction speed is trouble for developers when scaling up thousands of nodes.
There are also security issues, even though DLT is believed to be very secure. The threat lies in the application layer; as third-party security vulnerabilities can hide without detection. Despite this, blockchain is a way to secure AI knowledge bases from corruption.
All this tells us that modern technologies like DLT are receiving lots of support, and are still being developed despite obstacles. Blockchain technology creates a decentralized ledger to keep a record of all transactions. Efficiency is increased due to the transparency provided. This technology also allows for asset transfers without using third parties, which reduces expenses.
People are looking for an easier and more convenient way to get personal financial services. Businesses are looking for easier and more convenient ways to actually conduct business. The changes in money transfers thanks to DLT is a big step for the corporate world. Terms such as FinTech, cryptocurrencies, and blockchain have entered the corporate world and changed the way we use cash. Will we live in a cashless world eventually and quit using banks? No one knows. But it’s evident that globalization in business processes requires a decentralized and digitized system for payment and distribution of funds.