Did you know that the first way to track business costs, inventory, and accounts payable was on a stone tablet? Around 3200 BCE, Mesopotamians used cuneiform on rocks to record the increasing amount of inflows and outflows of trade, goods, and labor during one of the first economic booms of the ancient world. 

Thus, the ledger was born - an organized system for people to track payments, business operations, and account balances.

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Since then, ledgers have evolved over the centuries:

• In 1300 CE, Italian merchants created the double-entry system, which is the foundation for today’s business accounting and financial reporting
• Throughout the 1800s, central banks became institutional ledgers for fiat currencies, global economies, trade between countries, foreign exchange, and more
• 2009 was the birth of blockchain technology powering cryptocurrencies like Bitcoin - effectively decentralized ledgers operating on a global network
• Today, modern-day financial innovators rely on ledger technology to power their products’ services and manage a huge pipeline of customer data 

You wouldn’t expect today's financial builders to use a stone tablet to track all these processes. But surprisingly, many FinTechs are forced to connect to decades-old ledger tech from core banking system providers that are cumbersome to deal with and prevent efficient operations.

Fortunately, there’s new, flexible ledger software called “ledger as a service” that can help scale financial use cases quickly, enable new technology builds, and track financial services more efficiently. 

In this article, we introduce FinTech builders to modern ledger technology that "rocks" in a different way. Read on to learn about:

• What a ledger is
• Why ledger technology is important for modern FinTechs
• Ledger as a service
• Benefits of using ledger as a service

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What exactly is a ledger?

Businesses and financial institutions have used ledgers for thousands of years to keep track of of customers’ accounts, balances, key events, or money movement transactions. Even though a FinTech app would have vastly more computing power and features than the Bank of England did in the mid 1800s, the necessity for an accurate book of record still remains. 

Ledgers for traditional banks: The ledger is an integral part of a bank’s “core” operating system, acting as the data foundation that facilitates transactions. A bank’s core system houses all of the account information for their customers and is also responsible for powering the workflows of a bank’s products. This includes calculating interest rates on a checking account, generating payment notices on a loan, and more. 

Ledgers for FinTechs: The function of the ledger is essentially the same for a FinTech as it is for banks. The data stored in the ledger interfaces with the product’s workflows, making it a key piece of the overall user experience and product capabilities. On top of that, this customer data from the ledger is used by teams to track behavior and gain insights, while also being monitored by sponsor banks to ensure regulatory compliance. 

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Why are ledgers important for FinTech builders?

You have a great vision for a FinTech app or an embedded financial product. You’re going to allow your customers to open bank accounts, move money, receive cards - whatever your FinTech idea is. But how are you going to keep track of all of this financial data, ensure it flows to your sponsor bank, and meets regulatory requirements?

That’s the job of a ledger: Provide a single source of truth for customer, account, and transaction data for financial products. 

A ledger is necessary infrastructure for any product that allows transactions or contains account balances. When you begin to develop the architecture of your bank-supported financial product, you have two choices for where your ledger and all of your customer data will live:

1. You can leverage your sponsor bank’s ledger by connecting directly to it, or, use a platform that is directly integrated into it. In either approach, data and processes live within your sponsor bank’s core system. A downside is this forces you to make outdated banking technology part of your tech stack.

2. You can leverage a modern ledger system that sits alongside your sponsor bank’s core, not within it. This would be provided by a ledger as a service provider, giving you access to the flexibility of an open architecture and control over your valuable data. 

‍What is ledger as a service?

New FinTech products have changed the way that consumers and businesses open bank accounts, pay for products, and move money. One of the hurdles that comes with innovation is that legacy systems, such as a bank’s core, may not be compatible with forward-thinking products built and launched today. 

For instance, many of the popular banking core systems currently in use were built 20-30 years ago to the needs of traditional banking operations. On top of that, the modernization of banking core tech has been slow, to say the least. 

When building your financial product, integrating directly into your sponsor bank’s core system forces you to develop your product capabilities according to the rules and structures of their ledger system. The need to tailor a product roadmap to the way a traditional banking core was built poses a problem for modern FinTechs. 

This is where ledger as a service can help. 

Ledger as a service technology provides FinTech builders with modern ledger systems that are tailored to innovative financial use cases of today and have architectures designed for agility. These cloud-based ledger solutions have distinct advantages over the on-prem core systems that many banks still operate with, like:

• Freedom from the constraints of your partner bank’s core system: Not only are ledger as a service solutions purpose-built for modern financial use cases, but update or feature requests can also be fulfilled quickly. Having any sort of change or update made to a traditional banking ledger could prove to be an exercise in extreme patience. 
• Data architecture that is built with customer and developer experience in mind: Customer data is rapidly accessible, giving FinTechs the power they need to enhance their customer experience. Using a ledger as a service provider means that your customers’ financial data lives on a ledger that sits alongside your sponsor bank –not within it. Then, through a process known as reconciliation, your ledger’s data is reconciled to your sponsor bank’s general ledger. This creates a seamless flow of data between your product and your sponsor bank’s core system. 

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The power of building your financial product using ledger as a service

Ledger as a service tech offers three, distinct benefits for people who build their financial product with it:

1. FinTech developers can quickly build more innovative product capabilities enhancing their customers’ experience
2. FinTech developers gain better customer insights through increased control of their data pipeline
3. FinTech developers can improve their own operational effectiveness because it’s entirely in their control

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Build more innovative product capabilities

Ledger as a service has an open cloud-based architecture, increasing your flexibility as a product builder and expanding the use cases and functionality you can develop.

For example, say you want to offer banking services to customers who do not have social security numbers, and allow your customers to use other forms of identification for identity verification. There are many traditional banking ledger systems that would simply be unable to support this as they require a social security number prior to account opening. Modifying a traditional ledger system to add this piece of functionality might take months. 

Not only do traditional ledger systems limit the possibilities of your product’s functionality, they may also limit the vendors you can work with. Some banks’ core systems only work with a preferred vendor for a certain service – for example, KYC operations can only be performed by one company.

These constraints restrict how your product can be built and the vendors you can integrate with. Building your product using a more flexible and modern ledger can greatly increase the use cases and functionality that are possible for your financial product. 

FinTech tip: Even if your sponsor bank’s core supports your use case today, be mindful of your product roadmap; if there is a key feature that your customers want later down the road, you may be unable to make that update due to your ledger’s constraints. 

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Gain better customer insights through increased control of your data

When you begin receiving thousands or even hundreds of thousands of transactions flowing through your product daily, your customer data becomes increasingly important. This data can enable you to anticipate your customers' needs and ultimately create a better user experience. 

When you integrate directly into a bank’s core system, customers’ transactional or account data lives within that core. Some of this data may be readily available to you, but other data points may only be visible by the bank, requiring you to submit requests to receive the data. 

For example, payments data – since payments are a multi-step process that involves multiple systems, FinTechs who integrate into a bank’s ledger often only have certain pieces of the payments data. When using a modern ledger as a service system, the data insights for that payment are all included in the same object. FinTechs don’t need to request data from different systems to get a 360-degree view of the payment. 

FinTech tip: Using ledger as a service, you gain more control over important customer data to better understand behaviors or find new patterns. When a new customer creates an account, it is actually your product creating that account, rather than the bank. The data is also available to you in real time through a dashboard in a modern data structure, which will likely be a better fit for your typical customer flow. This gives you and your team increased visibility over your customers’ data, all of the transactions they conduct, and other key transactional events that take place. 

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Improve operational efficiencies

With a ledger as a service, all of your data and account structures are decoupled from your bank’s core operating system, resulting in more flexibility and control for you. Crucial pieces of your product, such as the flow of funds or workflow logic, can be optimized for both the customer experience and back-office efficiency. 

For example, one of our FinTech developers set up their workflows so that transactions are either approved or denied based on logic that is customized to fit their product and their customer profile. Other workflows that a ledger as a service can help optimize include customer notifications, interest calculations, statement generation, etc. 

FinTech tip: There is a difference in how the data is architected between traditional banking cores and modern financial products. Modern products are typically built on an event-based architecture. If an event occurs, let’s say a customer’s payment is declined, then the product sends a notification to the customer in real time. Traditional banking cores, however, are still catching up with this event-based architecture. Building this functionality using a traditional banking ledger may require additional operations or product development to fine-tune the customer experience. 

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Choose a ledger that sets your product up for success

As you are building your financial product, it is important to have the infrastructure you build on be as modern as your product. The “___ as a service” trend has helped the innovators of today quickly access the building blocks they need to build world-class financial products, and ledger as a service is one of them. 

Modern ledgers ensure FinTechs are not handcuffed by legacy technology. They give those who are building financial products the ability to build more innovative product capabilities, increased control of their customer data, and improved operational efficiency. 

Synctera’s banking as a service platform is built using a lightweight, modern ledger, that is decoupled from our banking partners. This ledger as a service, combined with our robust reconciliation technology, gives you increased control and flexibility over your financial product, while still offering the peace of mind that there are no missing transactions or funds.

Want to learn more how Synctera’s Ledger and Banking as a Service platform can help you build the next FinTech app or embedded financial product? Click the button below to get started:

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