Corporate banking has long been a relationship-based business, with large global banks having the distinct advantage of being able to provide clients with a comprehensive set of financial services delivered through integrated solutions. Distributed ledger technology (DLT), often referred to as blockchain, threatens to disrupt the sector with its potential to improve visibility, lessen friction, automate reconciliation, and shorten cycle times. In particular, corporate banking use cases focusing on traditional trade finance, supply chain finance, cross-border payments and digital identity management have attracted significant attention and investment.
Traditional trade finance
Largely paper-based with extended cycle times, DLT could eliminate inefficiencies arising from connecting disparate stakeholders, risk of documentary fraud, limited transaction visibility and extended reconciliation timeframes. DLT could finally provide the momentum needed to fully digitise trade documents and move towards an end-to-end digital process.
Supply chain finance
SCF is commonly applied to open account trade and is triggered by supply chain events. Similarly to traditional trade finance, the pain points in SCF arise from a lack of transparency across the entire supply chain, both physical and financial. DLT has the potential to be a key enabler for a transparent, global supply chain with stringent tracking of goods and documents throughout their life cycle.
The traditional cross-border payment process often involves a multi-hop, multi-day process with transaction fees charged at each stage. There are potentially several intermediaries involved in a cross-border payment, creating a lack of transparency, predictability and efficiency. DLT offers an opportunity to eliminate intermediaries, lowering transaction costs and improving liquidity.
KYC/digital identity management
Managing and complying with know-your-customer (KYC) regulations across disparate geographies remains a complex, inefficient process for banks and their corporate banking customers. For corporate banking, the DLT opportunity is to centralise digital identity information in a standardised, accessible format, including the ability to digitise, store and secure customer identity documentation for sharing across entities.
Banks and fintech firms are experimenting with DLT solutions for various corporate banking use cases. In what seems like unprecedented collaboration between financial institutions and technology providers, consortia are working on accelerating the development and adoption of DLT by creating financial grade ledgers and exploring opportunities for commercial applications.
The maturity cycle for the various use cases depends on a number of factors, not least of which are financial institution requirements for interoperability, confidentiality, a regulatory and legal framework, and optionality.
– This article is reproduced with kind permission. Some minor changes have been made to reflect BankNXT style considerations. Read more here. Main image: isak55, Shutterstock.com