Italian banking system goes on blockchain to cut operational risk

News and opinion on finance

At the end of April, 32 banks in Italy went into full production with one of the first large-scale deployments of blockchain in interbank markets.

While JPMorgan was far ahead of the pack in October 2018, when it launched the interbank information network (IIN) that allows its correspondent banks quickly to chase down details of failed cross border payments and rectify them, the new Spunta Banca DLT application is set to connect up an entire domestic banking system on distributed ledger technology (DLT).

Associazione Bancaria Italiana (ABI), the Italian Banking Association, built the application to swiftly and efficiently reconcile discrepancies in the separate ledgers for so-called nostro and vostro accounts that Italian banks hold for each other. It operates as a permissioned network on R3’s Corda enterprise platform.

It removes the pain of reconciling mismatches that used to take days or weeks to resolve. Mismatches can now be spotted and reconciled immediately 

 – Charley Cooper, R3

Among the 32 banks now using it are leading institutions such as Banca Mediolanum, Banca Monte dei Paschi di Siena, Intesa Sanpaolo, UBI and UniCredit, as well as the Italian operations of foreign banks, including BNP Paribas and Crédit Agricole.

From a pilot between 18 banks testing the system in the first quarter of 2020, 32 using it now, 23 more to join later in May, then another wave due on in October, all Italian banks are expected to be using it before the end of this year.

David E Rutter,

David E Rutter, chief executive of R3, says: “This heralds one of the most significant real-world digital transformations in the interbank financial services sector to date.”

Blockchain’s early pioneers promised much for the technology, but delivered less. Ironically, with the hype now fading, it is finally becoming embedded in digitalized banking by providing simple solutions to pressing problems.

Charley Cooper,

“The Italian banking system has had difficulty with the reconciliation of interbank transfers going back for years if not decades,” Charley Cooper, managing director at R3, tells Euromoney. “The ABI took the view that this area was a perfect candidate to be modernized through DLT.

“We have been working on this project for two and a half years with ABI Lab, the project coordinator and ABI the project sponsor, as well as with SIA and NTT Data, the technology partners.”

Operational risk

After tests at the end of February covering movement of seven million data points, the technology is now set to digitalize the entire process of reconciling transaction flows that generate accounting entries in the reciprocal accounts of Italian banks, as well as the management of pending transactions, so reducing operational risk across the system. 

Silvia Attanasio,

Silvia Attanasio, head of innovation at ABI, says: “The first benefit was that the banks gained full visibility of all the information about the accounts, both nostro and vostro, via a dashboard.

“Traditionally, getting this information has required as many phone calls as the number of involved parties, and waiting for the answer from each one.”

R3’s Cooper explains: “Spunta Banca DLT is a back-office platform that streamlines the bilateral reconciliation of transactions between Italian banks, standardizes the overall process, performs checks on a daily rather than on a monthly basis, automatically detects mismatched transactions and provides real-time resolution management.

“It removes the pain of reconciling mismatches that used to take days or weeks to resolve, with banks emailing spread sheets and phoning each other. Mismatches can now be spotted and reconciled immediately.”

Constant consultation

Banca d’Italia was not just consulted along each step of the way – it made clear its wish for a private permissioned network, Cooper says.

“That is hugely significant. You recall central banks’ and regulators’ caution around Facebook’s Libra. R3 works closely with regulators around the world. We want to enhance the financial system not disrupt it.

“And when we built Corda, we knew an essential requirement was for it to be highly scalable. This was one of the main requirements of ABI, given the scale of the project.”

It will be a question for each bank how long to maintain its legacy ledger system in parallel with the Spunta Banca app. Few will flip a switch and depend on the new platform entirely from the start. The return on investment will only become clear once the whole banking system is on board.

Daniele Savarè, director of innovation and business solutions at SIA, adds: “Spunta Banca DLT could, therefore, be the forerunner for a series of further systemic projects in the banking and financial sector in Italy and Europe.”

Spunta Banca still does not move money itself in tokenized form across new payment rails, but that may be the next step.

Heinrich Zetlmayer,
Valley Ventures

Heinrich Zetlmayer is the founder and general partner of Blockchain Valley Ventures, which invests in blockchain companies across industry sectors including finance.

He tells Euromoney: “For the existing banking industry, investing and trading in digital assets has not become a big business yet, though some are now developing custody offerings for crypto as a first step and there are some interesting pilots.

“But I am very excited by what central banks are now doing with digital currency because that brings a new legitimacy and security, as well a transaction currency for moving value on blockchain.”

He adds: “Banking regulators are getting comfortable with this technology. Having a digital euro, a digital dollar or Swiss franc might quickly unlock substantial new efficiencies. Blockchain is actually a very elegant software architecture for financial transaction processes.

“We have seen banking projects where it can take out 50% of the operational costs.”

Lower costs would be welcome right now; reduced operational risk even more so.