How The Blockchain Optimizes Liquidity of Nostro Accounts To Reduce Costs
What is a Nostro Account?
Nostro accounts are foreign currency bank accounts companies use to manage their international payments. The term Nostro comes from the Italian word for “ours” and describes any currency account held by a bank in another country.
How do they work?
Nostro accounts allow banks to transfer funds across borders without physically moving money. So, for example, when you make an international payment, your bank will send the money from its Nostro account in your home country to one of its Nostro accounts in the recipient’s country. This ensures that the funds arrive safely, quickly, and at a low cost.
What are they used for?
Nostro accounts are most commonly used by large corporations with many international transactions or subsidiaries worldwide. However, they can also be useful for companies with foreign investments or subsidiaries requiring frequent funds transfers between countries.
However, it is important to note some of the limitations of Nostro accounts;
1.They can be costly to maintain.
2. They can be time-consuming to manage — especially if you have multiple counterparties.
3. They require you to hold extra capital for each counterpart, which can impact your return on equity and liquidity ratios.
Blockchain offers distributed tracking of Nostro accounts.
Banks maintain Nostro accounts to facilitate international payments. They are used to settle payments between trading partners with different currencies, and the bank’s funds must back them.
Blockchain offers real-time tracking of these accounts, which could help reduce costs and improve efficiency.
Blockchain Tracks Pending and Failed Transactions In Real-Time
A real-time liquidity update in Nostro accounts has been almost impossible to implement because of the problems associated with pending transactions. Pending transactions can sometimes remain pending for hours or even days.
Because some transactions might be part of an investigation for illegal activities, we show the transaction’s status after business hours. As a result, we cannot show you what will happen with that transaction during the day, but we can tell you its status once it’s completed.
Blockchain transactions are processed quickly because of the system’s decentralized structure. Pending transactions can be tracked using a unique system called mempool, which shows which have failed in BTC and ETH. Successful transactions are displayed instantly on Etherscan.
If Nostro accounts are using the Blockchain, it will be easy to track pending transactions. All reports can be made in real-time, without waiting until the end of the day to get an accurate picture of pending and successful transactions.
Immutability, Permanence, and Stability
The Blockchain’s immutability, permanence, and scalability attributes can help reduce liquidity problems associated with Nostro accounts by storing every transaction permanently and making it easy to refer back to them in the future.
This means that a Nostro account holder could have complete visibility into their account information, including balances, payments, and receipts, which may help reduce the manual reconciliation needed to maintain a healthy balance sheet.
Reduction In Operational Costs
Solving the liquidity issues by using the Blockchain can dramatically reduce operational costs. Operational costs associated with Nostro accounts are mainly owing to the reconciliation activities.
As discussed above, Blockchain can help optimize real-time liquidity tracking. This optimization will reduce operational costs. By offering data in real-time, reconciliation will either be done in real-time; as such, just offering data in real-time will drastically reduce the operation costs.
In conclusion, blockchain technology solves many cons of the Nostro accounts by allowing trackers to have a single network for all of their successful and pending transactions, making it easy for them to update liquidity data without much assistance.
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