Wells Fargo and ANZ have collaborated to create a shared distributed ledger platform prototype for correspondent banking aiming to improve the current Nostro reconciliation and settlement process in the dimensions of time, effort, and liquidity.

The proof of concept paper listed the various challenges faced by the current Nostro reconciliation and settlement process. The current system is plagued with poor payment transparency as end-of-day batch reconciliation process can result in a 24 to 48-hour delay in the visibility of transaction status.

Also, it pointed out onerous reconciliation activities and investigations, as the current double entry accounting model requires financial institutions on either end of a transaction to keep their own record of that transaction. The maintenance of these separate records, coupled with the delays associated with an end-of-day batch process, give rise to the need for each bank to retrospectively reconcile their separate views of the same events.

There are also delays in advising of fund disbursement. Due to end-of-day batch processing and time zone differences, parties to a transaction may be unaware of the settlement for 24 hours or more after it has occurred, often leading to downstream delays to the enrichment of the end beneficiary, the paper said.

Lastly, there are inefficiencies in management and usage of liquidity and funding whereby banks are forced to make funding decisions based on estimations rather than fact.

In March 2016, the two banks entered into an agreement to prove that DLTs could be used to improve the current Nostro reconciliation and settlement process. With both ANZ and Wells Fargo becoming founding members of the Linux Foundation’s Hyperledger Project, the Hyperledger fabric was selected as the technology of choice.

The paper said that by storing information on a distributed ledger, the two banks were able to provide the ultimate solution for interbank transparency and could ascertain the intra-day balance of their Nostro accounts; view the status of inward and outward transactions; and calculate the correspondent fees accrued for each transaction.

“These capabilities offer the potential to eliminate the need for manual reconciliation, significantly reduce the requirement for lengthy investigations, accelerate confirmation of interbank settlement, and optimise access to liquidity”, the paper said, adding that these benefits could also support an improved customer value proposition.

The paper concluded saying that cross-border payments and correspondent banking are ripe for rejuvenation, and added:

“Our proof of concept has demonstrated that DLTs have the potential to add real value to both the customer experience and the efficiency of correspondent banking”.