Saving Big Money: How a small fintech firm figured out how to save banks billions with DLT

There’s a lot of chatter these days about the viability, perhaps even the legitimacy, of distributed ledger systems for the financial markets. Lost in the “blockchain is dead” noise are some interesting cases that show just how DLT technologies can be used effectively in key pain points in the market.

“This has been a true hype cycle,” said Arjun Jayaram, CEO and founder of Baton Systems.

The Gartner Hype Cycle is the theoretical sort of N-shaped graph that indicates an innovation trigger, inflated expectations, a so-called trough of disillusionment and then an upward slope of enlightenment, or adoption. Jayaram has seen it up close but may be finding the right way to gain adoption with the firm’s DLT high-speed payment service.  

What Jayaram figured out in meeting with more than 30 banks over the past four years is that they really do want innovation and to improve capital efficiencies anywhere they can. What banks don’t want is to redesign or replace existing software and systems. So Baton has focused on one key bottleneck that aims to save big time money for banks – the money transfer process.

There are hundreds of billions of dollars set aside in various custody accounts for pre-trade and settlements. The transfer of those assets in 2019 takes an astoundingly long time. Jayaram said once trades are settled, the cash transfer between two banks can take 48 hours. So Baton built a DLT system that essentially sits on top of the bank transfer mechanism and moves cash in 3 minutes.

The company has been working with CME Group and Citi and is looking to bring more banks on board. Its DLT solution is designed to work with just about any of the payment protocols out there and drop assets securely into each bank’s database. The acceleration of this process is all about the efficiency of capital and the savings that come with that. Jayaram said the system can provide a return on investment in its first year for customers.

This is where blockchain and DLT can serve the markets. Rather than talking about grand solutions like, for example, replacing the clearing house model with blockchain, firms are finding big wins in small but critical pieces of the trade transaction chain. Jayaram sees even more opportunity in the coming years as more central bank depositories move toward 24-hour services.

“What we found over the past four years is that the cost of capital is very high and banks want to upgrade. But to ask a bank to change its systems is very difficult,” Jayaram said.

But finding a way to plug DLT into the process without major disruption may go a long way towards showing just where we are in the hype cycle.