It’s important to remember what consumer problem Ripple is trying to solve - that of slow and expensive cross-border payments, whether person to person or business to business. Today the world sends more than $155 trillion across borders. This is a major global issue for individual consumers and businesses alike. Brad Garlinghouse, Ripple’s CEO is often quoted in various sources as saying that it is physically quicker to fly actual bank notes from say New York to London (yes, he means on a plane), than to send it through the correspondent banking system from the US to the UK. He is correct of course, if you assume that you send the payment from a bank in the US to a different bank in the UK.
Correspondent banking is dominated globally by a small number of banks, with JPMorgan (Jamie Dimon’s bank) being the global no. 1. It’s big business and earns enormous revenues for the likes of JPMorgan, HSBC, Citibank etc.
Why have banks and remittance companies signed-up for Ripple ?Firstly, what they have actually sign-up for, is RippleNet. Ripple now has over 100 banks and payment providers. RippleNet is a decentralized global blockchain network of these entities that use Ripple’s distributed financial technology and provides real-time messaging, clearing and settlement of financial transactions.
This is the first time such a network has existed before and Ripple have done a great job at on-boarding these banks. When you join the network, you sign-up to their technology, and their tech of course provides a key part of the overall solution.
The newest members of RippleNet include Credit Agricole, Currencies Direct, and they’re now on the path to join existing members like SEB and Siam Commercial Bank who have deployed Ripple solutions commercially.
What are the benefits of RippleNet ?RippleNet has a standardised ruleset, which has been created with input from the banks, a liquidity solution which reduces costs (more about that shortly), plus speed and traceability of payments.
Similar to say Visa or MasterCard, RippleNet provides a consistent payments experience through a (network member) Rulebook, which encompasses a set of payment rules and standards. Those of you familiar with payments will know that you can’t have a payment network without such standards and rules. This Rulebook delivers operational certainty and legal clarity for transactions over RippleNet. Both members and users sign a Network Service Agreement and implement the rules and standards as outlined in the Rulebook.
The RippleNet SolutionsRippleNet has two main solutions:xCurrent which processes real-time payments between the network from a messaging and settlement perspective.
xRapid which provides ‘on-demand liquidity’ through access to a liquidity pool of digital assets i.e. XRP, that eliminates the need to hold nostro accounts in destination currencies.
First hand experience of the liquidity problem in cross-border payments
I can relate to this problem from first hand experience. Let’s take the problem of trying to transfer funds from say the US to Mexico, just like the stream of remittance companies now signing-up to xRapid. Note that US bank account to Mexico bank account or US over the counter payment to a Mexico bank account, are very popular transactions types for remittances. The issues with this are as follows:
Identifying receiving banks: You have to talk to a lot of banks in Mexico in the first place to find an appropriate one. You may even have to run an RFP
Bi-lateral contracts: Once you have identified your partner bank, you have to agree a bilateral contract. In the contract, you will need to cover topics such as messaging, settlement, commercial fees etc. This is a significant undertaking and the work involved can be significant. If a bank has already signed up to a network though like RippleNet, you don’t have to do this.
Pre-funding nostro accounts: Worst of all in this scenario, given the volume of payouts in Mexico, any Mexican bank will require a large ’pre-fund’ into a dedicated account (i.e nostro account) of the sending party. This pre-fund is the source of the liquidity in the solution, or in other words the funds to payout remittances in Mexico whenever they are demanded by receivers. This process ties-up expensive capital that could be deployed elsewhere in any business
Monitoring and topping-up the pre-fund: The pre-fund also has to be monitored and topped-up which requires reasonable effort and supporting processes.
This end to end process is not to be underestimated in terms of required effort and represents a significant hurdle.
How does xRapid solve this problem? This is where the use of XRP comes in. A payment journey from a US bank to a Mexican bank with xRapid in our example looks like this:
Both US and Mexican banks connect directly to digital asset exchanges in both the US and Mexico
When a transaction is originated, USD is exchanged into XRP in the US digital asset exchange
In seconds, XRP is sent to the Mexican digital asset exchange and then converted into Mexican Pesos. So the exposure time to any XRP volatility is very short – indeed often commercial terms can be agreed with the asset exchanges to remove 100% of the risk for the banks
The pesos are then made available on the Mexican side for the beneficiaries
The diagram below illustrates the XRP to MXN (Peso) process:
So in short, having this connection to xRapid solves the problem in a very neat way and shows XRP can be leveraged to enable the process.
Recent success of xRapid with remittance companies
In the last 12 months, Ripple has on-boarded the great and the good in the remittance world including MoneyGram, Western Union and more recently ViaAmericas. Many were slightly sceptical at first now see the benefits.
According to recent pilot results, participating financial institutions saw a savings of 40-70 percent compared to what they normally pay expensive foreign exchange providers.
In addition, an average xRapid payment took just over two minutes, compared to today’s average of 2-3 days when sending cross-border payments. The leg of the transfer that touches the XRP Ledger only takes 2-3 seconds with the additional processing time happening while the transfer moves across the intermediary digital asset exchanges and local payment rails.
“It’s encouraging to see positive xRapid results because they validate what many in our industry already know: certain digital assets have utility,” said Asheesh Birla, SVP of Product at Ripple. “XRP’s utility lies in its speed and scalability, which makes it the perfect fit for cross-border payments. The XRP Ledger can send 1,500 transactions per second.”
The financial institutions included in these pilots were testing payments from the U.S. to Mexico. This is a popular and competitive market, so payment providers are looking to gain a competitive advantage by lowering costs and speeding up payments with xRapid. Up until now, they have been required to either pre-fund bank accounts in Mexico - leading to tied-up capital - or go through the correspondent banking network, which is expensive and slow.
“We were very pleased with our pilot results. It’s clear that xRapid can lower liquidity costs while increasing payment speed and transparency in a way that facilitates rigorous compliance controls. We believe that digital assets like XRP will play a key role in the future of cross-border payments, helping to safely address some of the structural inefficiencies of legacy settlement infrastructure as their adoption grows. We look forward to exploring next steps with Ripple.” - Paul Dwyer, Co-founder and CEO, Viamericas.
Moving on to Commercial FX paymentsAnother big prize is commercial foreign exchange payments. This is because transaction sizes are much bigger than person to person payments, and clients typically transact on a much more frequent basis.
Currencies Direct a UK based commercial FX company were one of the first, but now Toronto based Cambridge Global Payments, which has over 13,000 clients around the world and handles $20 billion in international transactions annually, is piloting both xCurrent and xRapid.
Mark Frey, Chief Operating Officer for Cambridge Global Payments, is confident that blockchain powered solutions like xRapid can not only help Cambridge improve their customers’ payments journey, but also spur critical innovation in their industry..
“We are excited for the insights this pilot program is expected to deliver, and we will use that information to help both Cambridge and FLEETCOR develop our use cases for blockchain in international payments,” said Frey.
ConclusionsA number of points spring to mind:It seems to me that Ripple is pushing hard to grow the RippleNet network and to continue to iteratively improve its products.
Remittance companies were reluctant to team-up with Ripple as first, possibly because they can see the value of their networks reduced and therefore their margins falling. But if fees to send money fall, it is likely that the category will grow.
If the likes of Ripple continue to play a bigger role in managing the ‘cross border payments plumbing’ going forward, then brands will become more important in the remittance business. As a marketing guy, I think remittance companies who have weak brands may fall by the wayside.
With any network, you need toz` get a critical mass point (of members), for it to really take off. We are not there yet, but the pace of partner acquisition and piloting at Ripple is certainly increasing.
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