• Saurabha Sahu, Senior Consultant at Mindtree


• 06.05.2016 08:15 am
Cloud , Blockchain

In continuation of my previous blog on Blockchain: Need of Future for Financial Industry, let us now try to understand one more path breaking revolution in the field of Accounting and Ledger maintenance. This will provide a better and efficient way of fund settlement between two parties domestically as well as internationally, where Foreign Currencies are involved.

Settlement and Accounting for Banks (Local and Foreign Currency)

Any transaction to materialize, it should have an obligation. To fulfill the transaction, all mutually agreed parties in the ecosystem should get involved. The Process of transaction can be either One-time or recurring based on the agreement between the parties.

Settlement lifecycle involves following parties:

• Transaction Initiation: Debtor Bank to the Transaction Initiator (Debtor)
• Interim Transaction:
  • Debtor Bank to Correspondent
  • Correspondent to Intermediary
  • Intermediary to Creditor Bank
• Transaction Termination: Creditor Bank to Beneficiary (Creditor)

While we talk of real time settlement of financial transaction between two banks, reality is different. The settlement of funds takes place either in a specified Interval, or specified time of the day, or after day or two generally referred as T+1 or T+2.

Settlement of fund can happen for different kind of transactions like Credit Transfer, Direct Debit, Collection, ATM Transaction, e-commerce payments, Security and Bond Trade Settlement etc. In all these transactions, some and other way Banks are getting involved.

The Central Bank of the country plays a vital role in multicurrency fund settlement during inter and intra country transactions. Multicurrency transaction Settlement can be carried out between Central Banks, Commercial Banks and Non-Financial Service Providers. Every party in the chain want their part of settlement as soon as possible to mitigate the financial risk for the obligatory transaction.

Given the customer expectation, Financial Institutions and Non-Financial Institutions are looking for an innovative and simple accounting and ledger maintenance possibility which should enable following:

• Faster and real time Clearing and Settlement
• Data Security
• Easy transaction data retrieval process
• Error free and Risk free transaction processing
• Eliminate data manipulation
• Efficient  and Qualitative Audit of transaction
• Meaning full details maintained in Ledger
• Sound Financial Reporting for Balance Sheet and Profit and Loss Statement

This Blockchain mechanism will give the flexibility to settle the fund across all geographic locations for the banks at real time or near to real time. The additional flexibility will come when the accounting of each transaction will be done for each transaction wise.

Example: Customer-A (Debtor) wants to transfer funds to Customer-B (Creditor) for an amount $20.

A payment of $ 20 from Customer A to Customer B, where Customer A and Customer B are customers of two different banks, requires the Local Clearing systems today. This solution enabled distributed ledgers offer a third option: Any party, such as Customer C (unrelated to the banks) can create a channel between ledgers and facilitate the payment. The transaction structure can be conceived as Customer A paying Customer C on one ledger, and Customer C paying Customer B on the other ledger. Customer C’s role is fully automated using a distributed model, and Customer C can earn transaction fees as per the choosing.

(Please refer to the below diagram: Cloud Based Ledger Maintenance)

Now, it is the time for the Financial and non-financial Institutions to go for more realistic settlement of fund, which will always give a better exposure in-terms of their day to day business related functions.

Advantages of Cloud Based Accounting:

Below are some of the advantages for Institutions from Cloud Based Accounting

• Real time visibility of account position for Financial Institution
• Commercial Banks need not wait for the Central Banks to settle the actual fund
• Cloud based Ledger Accounting will maintain the logic of forecasted transaction view as well as settled transaction
• Bank’s treasury will have efficient Liquidity Management, by viewing the Nostro Accounts Limit and Balance
• Value Date of transaction will be on the same day as of the transaction initiation
• Embargo Check on the Banks will be eradicated as they will be able to manage funds efficiently  
• Settlement of Cross Border International FX Payment transactions will be settled in a Straight through processing
• Security and Trade settlement for Equity, Bonds will be much faster and safe
• Sequential Multifold Complex transactions will be carried out in a much simpler fashion
• Central bank will never have the deadlock situation during the Clearing and Settlement process
• Transaction settlement will be based on each transaction

Above can be achieved through a new cloud based accounting, where the ledger will be maintained for the two parties in a cloud based network.

Benefits of Blockchain and Distributed Ledger Maintenance on Cloud:

Below are some benefits perceived for financial and non-financial institutions by using Blockchain along with Cloud based Distributed ledger maintenance

• Ledger will be accessible to all who are part of the transaction processing only
• No restriction on time or geographical location for accessing the Ledger details
• Central Banks can settle the fund at any time during their working hours
• Banks need not wait for the Settlement confirmation message for reconciliation of accounts
• Nostro Reconciliation and Transaction level Liquidity check would be possible for Banks, prior to processing any financial transaction
• Ledger cannot be viewed by unauthorized party
• Database maintenance cost for the Financial and Non-Financial Institution will be nearly NIL
• Institutions will overcome need to buy a bigger data base and space
• Transparency of data and transaction will be the ultimate advantage for the financial ecosystem
• AML (Anti Money Laundering) checks would be much simpler
• Disaster recovery will be easy
• No fear of data loss
• Removal of Complex relationship maintenance across the countries for data transmission

Time will no longer be a constraint for entities involved, to access the ledger and obtain the settlement details with maximum data availability for business reporting and auditing.

The amalgamated process based on Blockchain and Cloud based Distributed Ledger Maintenance should provide a greater edge to process the Financial Transaction across the Globe. This will reduce the cost of maintenance in Financial Institutions pertaining to the transactions. Financial and non-financial Institutions will be benefited from a new trend in transaction processing and maintenance of their accounting Ledgers. This will be a win-win case for Financial, non-financial institutions and Customers.

This discussion on data transmission method through Blockchain and the distributed ledger maintenance on Cloud will provide enormous benefit and scope for moving towards an innovative and flexible financial World.