Contrary to popular belief, distributed ledger technology (DLT), commonly known as blockchain, has more use cases for financial institutions than just cryptocurrency. Particularly, DLT has many practical applications in payments and digital transactions. Within payments, DLT can be used to prove a consumers’ identity to reduce identity fraud, improve the cost and speed of international payments, all while adding valuable additional layers of cybersecurity.
Proving Digital Identity
At the beginning of any transaction with a customer or member, financial institutions must prove a consumer’s identity. For digital channels, this typically happens through biometric security measures, such as passwords or even fingerprints. Branch transactions usually begin with a staff member reviewing a government-issued identity card, while ATM withdrawals require consumers to enter a PIN. Call center staff members are trained to verify a consumer’s identity by asking a series of security questions before proceeding on to discuss account information.
Financial institutions now have an opportunity to use DLT to verify identity through digital channels, using a self-sovereign digital identity. Self-sovereign digital identity is a global digital identifier built on a distributed ledger platform that permits consumers to interact securely with their financial institution. By giving individual consumers control over their personal identifiable information, this use case of DLT can create a truly secure and privacy-preserving flow of information when conducting transactions.
Cross-border International Payments
According to BIS, cross-border payment flows totaled more than $4.7 trillion in 2017 (https://www.bis.org/statistics/rppb1804.htm). With the volume and size of these transactions continuing to grow, financial institutions should consider their digital strategies around these payments types. SWIFT remains the norm for most international transfers, but these transactions typically take a day or two to clear and generally cost between two and three percent of the value of funds transferred, but can exceed 10 percent where payment volumes and values are low. Instead of relying on slow and costly wire transfer services, financial institutions can explore distributed ledger technology to reduce the cost and accelerate the speed of these transactions. These points of friction can all be addressed through DLT, which conducts transactions nearly instantaneously and could operate much more cheaply. Distributed ledger technology also has security advantages over SWIFT transfers, which tend to attract fraudsters making fraudulent transfer requests.
One of the primary advantages of DLT is its immunity, meaning information or transactions conducted through a ledger cannot be changed. The ledger is a database that is spread across several nodes or computing devices. These nodes each replicate and save an identical copy of the ledger, updating itself independently. In order to corrupt a ledger, a hacker would have to corrupt more than half of its nodes simultaneously, which makes distributed ledgers an exceedingly difficult target for fraud. Private ledgers, particularly, are secure networks for financial institutions to use for sensitive transactions. Distributed ledgers based on permissioned access are fundamentally different than permission-less or proof-of-work ledgers, such as the ledger supporting Bitcoin. As financial institutions learn more about distributed ledger technology, they should become more comfortable with the idea that this technology holds the key for safer, more secure payments.
Financial institutions have an opportunity to explore DLT for its many use cases, particularly its practical applications for payments transactions and security. As credit unions and banks familiarize themselves with this relatively new technology, they are sure to find that it provides solutions for many of the industry’s concerns about improving speed and cybersecurity. Creating digital identity solutions based in distributed ledger technology is vital to this revolution, particularly as verifying consumers’ identities is the cornerstone to any financial transaction. Financial institutions can leverage DLT to improve their payments strategies, whether proving a consumer’s identity, reducing the time and cost of international payments or enhancing their payments’ cybersecurity.
Julie Esser is chief engagement officer of CULedger, a CUSO that enables credit unions to enhance their digital strategy by bringing innovative distributed ledger applications to the market. For more information, please visit culedger.com.