While a number of financial institutions remain cautious about cryptocurrency, many use the underlying technology for other purposes.
The up-and-down swings of digital assets, and an uncertain regulatory climate, have kept a fair share of banks and credit unions on the sidelines. At the same time, FIs have shown a willingness to embrace distributed ledger technology (DLT) ahead of the volatile crypto market.Two such examples are New York Community Bancorp (Westbury, NY) and National Bank Holdings (Denver, CO). Each has forged partnerships with Figure Technologies, which uses the Provenance Blockchain.
New York Community wants to use the tech to improve financial inclusion and lower costs and complexity in its mortgage operations. National Bank plans to use blockchain to enhance its digital platform.
What can the tech do?
DLT is digitalized and decentralized ledgers or books of records showing the movement of value from one entity to another. All participants collectively manage it without a central authority, transparently recording peer-to-peer transactions. It is difficult, though not impossible, to hack or see fraud in the system.
Blockchain is a type of DLT that stores data in blocks, chained together in chronological order.
DLT offers evolving applications that can improve many banking functions, enhance operations, and help more banks and credit unions remain relevant. FIs must weigh the risks and benefits of doing new things – SRM only recommends adding the tech if doing so improves functionality.
DLT can empower FIs to cut costs and become more efficient. It has the potential to remove friction points embedded within legacy banking processes.
Some common use cases:
Identity Services: By sharing data securely in real-time, Identity Management Services (IMS) can address challenges around Know Your Customer and anti-money laundering laws.
Lending and Trade Finance: DLT can streamline processes and allow for lending with fewer intermediaries. Smart contracts can automatically execute when conditions are met, making them tamperproof and immutable.
Payments: There are ways to use DLT to increase speed and security around internal funds transfers/reconciliation, cross-border payments, and other banking functions.
The Bottom Line
SRM recommends that banks and credit unions explore the potential for DLT. Evaluate existing systems and processes and examine the benefits of integrating new technology.
Be aware that regulation will slow down mass adoption as we wait for more agencies to weigh in on areas such as rules for data and transaction ownership. The National Credit Union Administration has shown its support, stating that all federally insured credit unions should track the emergence of technology that offers ways to increase the speed of service.
Remember that your competition goes beyond the bank or credit union down the street. It now includes neobanks, borderless online banking, fintech, super apps, and more. DLT gives FIs a way to meet growing consumer demands while providing a more personalized digital experience.
With the inevitability of a cashless society and a digital world, financial institutions need to look at potential pivots for critical banking functions. DLT could be a timely solution.