Modernizing Bank Settlements with Blockchain

While today’s banking system presents itself as fully digital, the core settlement architecture remains rooted in systems designed decades ago.

This infrastructure pose significant challenges as it is often built around fragmented legacy systems that are expensive to maintain, difficult to integrate with modern technologies, and slow to adapt to new regulations or products.

Against this backdrop, blockchain technology represents a viable solution for upgrading this infrastructure, offering shared-ledger settlement in real time at costs and speeds suitable for production volumes, and providing the structural overhaul that banking infrastructure requires, according to a new report by management consulting firm Roland Berger.

The paper notes that while many banks have already begun experimenting with blockchain, most activity remains confined to pilots and token gestures. The strategic challenge is therefore to move beyond experimentation while remaining compliant and managing risk.

It outlines four steps to meet this challenge. First, banks must quantify the greatest sources of financial drain, customer friction or risk of inaction, and isolate one or two high-impact business cases. Then, they can develop a strategy that concentrates resources where there is a clear return on investment, avoiding engaging in initiatives that lack measurable return.

Second, banks need to establish a dedicated digital assets team to bridge technology, finance and compliance. This team will be in charge of developing the strategy and implementation roadmap. It will require top-level sponsorship as digital asset programs are frequently met with skepticism across established banking structures, hence, clear executives backing is key to reduce internal resistance and signal institutional commitment.

The third step involves translating prioritized pain points into a well-defined pilot. This pilot should be contained, for example, within a specific currency corridor or product line, and supported by clearly defined success metrics. A key decision at this stage will be whether to build a proprietary solution or participate in an existing blockchain consortium.

Finally, the fourth and last step involves choosing the right blockchain based on alignment between the technology architecture and the operational and regulatory context in which it will be deployed.

While public networks like Ethereum offer transparency, liquidity, and access to a broad developer ecosystem, banks’ privacy and compliance obligations may make private or permissioned configurations more appropriate. Often, a multi-chain approach proves the most relevant.

Inefficiencies in current banking infrastructure

Despite improvements on mobile apps and digital channels, the core infrastructure of banking still runs on settlement architecture designed in previous decades. This legacy infrastructure is plagued with inefficiencies that are embedded in interbranch settlement, interbank flows, cross-border transfers and operational areas such as lending and trade finance.

Settlement processes still depend on reconciliation cycles and operating-hour limitations. Furthermore, large back-office teams continue to reconcile transactions manually, with one study indicating that 0.8-1.8% of these accounts are subject to error. These manual processes not only introduce delays and capital drag but also create a significant vulnerability to mistakes.

Cross-border transfers show a similar pattern. These payments are routed through intermediary and correspondent banks operating across different time zones and regulatory regimes, with each intermediary performing compliance checks before funds reach their destination, causing settlement times to range from a number of hours to several days. This accumulates fees along the chain, and introduces opacity throughout the journey.

Loan servicing is also plagued with timing gaps. Loan systems frequently rely on asynchronous updates across departments, creating temporary mismatches and limits responsiveness.

Escrow processes likewise rely on legacy infrastructure and time-consuming manual verification, with buyers and financial institutions maintaining separate records across independent systems. Verifying contractual milestones typically requires documentation exchange before funds are released, extending closing processes to as much as 30-45 days.

Similarly, trade finance remains heavily manual and document-driven. Transactions involve exporters, importers and banks that operate distinct record-keeping and compliance systems. These systems are rarely integrated, with verification requiring repeated document checks before capital can move.

The potential of blockchain

Blockchains are decentralized ledgers that allow transactions to be recorded, verified and synchronized across participants without requiring a central intermediary to reconcile accounts after the fact. This presents a fundamentally different operating model to a traditional bank core settlement architecture which uses centralized databases and trusted internal systems to process, reconcile, and finalize transactions.

For interbranch settlements, a bank could deploy a private blockchain network in which each branch operates as a node with read and write access. When a customer at one branch withdraws funds deposited at another, the transaction is recorded on a shared ledger and becomes immediately visible across the network, with balances updating simultaneously.

Major financial institutions are implementing tokenized deposits that enable immediate fund transfers across branches while reducing internal settlement friction. JP Morgan, for example, offers the Kinexys suite of blockchain services for moving money, tokenizing assets and exchanging financial information. JP Morgan is also part of the Canton Network alongside institutions like Goldman Sachs, HSBC, and BNY. The Canton Network is a blockchain network for regulated financial markets launched in 2023.

In interbank settlements, instead of routing transactions through correspondent chains or relying on end-of-day netting, banks participating in a blockchain network can record obligations on a consortium platform accessible to authorized members. This blockchain layer would sit above existing core systems and connect through APIs, allowing synchronization without requiring a wholesale replacement of legacy infrastructure.

This approach has already been tested through initiatives like the Monetary Authority of Singapore’s Project Ubin, which explored distributed ledger technology (DLT) for real-time gross settlement systems for interbank payments and securities settlement.

A shared blockchain ledger can also function as a single source of truth for loan data. When a borrower makes a payment, the update is recorded once and reflected immediately across relevant departments.

Versana illustrates this model in syndicated lending. The platform, which is backed by major banks, provides real-time visibility into loan positions, repayments and accruals for participating lenders.

Cross-border transfers are another area particularly suited to shared ledger settlement. Instead of moving through multiple intermediaries, transactions can be recorded directly on blockchain infrastructure between participating institutions, reducing reliance on correspondent chains, improving speed, and ultimately cutting costs. According to an analysis by cryptocurrency investment group Keyrock, stablecoins can reduce remittances fees by 92%.

Finally, trade finance and escrow arrangements can benefit significantly from blockchain technology. Platforms can digitalize trade documentation and store it on a shared ledger that is accessible to authorized participants. Smart contracts, meanwhile, automate verification by checking whether predefined conditions are met before triggering payment.

Similarly, escrow arrangements can be automated through smart contracts that hold funds on blockchain infrastructure and release payment once predefined conditions are verified. Rather than relying on manual confirmation by an escrow agent, execution is triggered automatically when an authoritative event is recorded.

American startup Propy exemplifies this model, using blockchain to modernize how property is bought, sold, and transferred. The company claims its model reduces closing time from 30-45 days to as little as 24 hours in some cases.

Featured image: Edited by Fintech News Swizterland, based on image by 21vectors via Magnific

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