Correspondent banking has evolved over the past 35 years, from automating telex processes amongst multiple correspondent banks, to a model where fewer, deeper correspondent relationships deliver increased efficiency, speed, standardisation, and compliance of international payments. Despite these improvements, correspondent banking still relies on the need to maintain and reconcile two separately held versions of the account statement (i.e. the Nostro account holder maintains their own mirror ledger). A number of challenges ensue, including:
- poor payment transparency, for both banks and customers; • onerous reconciliation activities and investigations;
- delays in advising of fund disbursement; and
- inefficiencies in management and usage of liquidity and funding.
These challenges could be largely addressed if the industry were to trust a single record of account that could be shared and maintained by multiple correspondent banks. Blockchains or distributed ledger technologies (“DLTs”) offer a novel solution to the requirement to maintain a single source of truth that is jointly owned by all participants in the system. When combined with process standardisation and improvement, this technology has the potential to increase the speed of cross-border payment finality, whilst also providing increased auditability and preserving the confidentiality of transaction flows. This concept paper explores the use of distributed ledger technology and the challenges and advantages of its use.