If you are among those who think that Ripple’s technology and cryptocurrency (XRP) will revolutionize the world of international payments, you’re in good company. The Euro Banking Association agrees with you as it explained in a paper called “Cryptotechnologies in international payments” authored by the Working Group on Crypto technology in International Payments.
The international payments environment
International payments are the global economy’s blood flow. They’re in high demand from both individuals and corporations. According to Deutsche Bank, this industry was worth about USD 1.2 trillion, and it was expected to double by this year. But the system for settling international payments has become something of a relic.
While the global financial system had modernized over the last decades (adopting the internet, better communication technologies, etc.) the SWIFT system, which is the standard global way of settling international transfers had remained precisely the same as it was in 1975 when it was instituted.
SWIFT is plagued by reliance on Nostro/Vostro accounts, multiple intermediaries for a single transaction, deferred settlement procedures, manual reports, and screening procedures.
The system is expensive, primitive, complicated. It can take several days for a single operation to be settled. This means that it’s costly and time consuming for banks and customers. Non-banking institutions offer a better service. That’s why MoneyGram and Western Union are giants. Yes, one of them, MoneyGram, partnered Ripple not too long ago. And, the other is almost ready to do so at full scale.
It’s been evident for years that if banks are going to compete in this vast market with the world’s remittance services, they will need to come up with an option better than SWIFT. In this context, blockchain and distributed ledger technologies are emerging as systems that can lower costs drastically, increase speed, transparency, and service to corporations and individuals alike.
Crypto technologies could be the key that opens the door for banks to compete in this ever-growing market, while still complying with international regulations in all the markets in the world.
These are the problems that the banks need to solve if they’re going to improve international payments.
- KYC and fraudulent checks. Complying with KYC regulations is probably the worst problem for banks today when it comes to international markets. KYC procedures are different in every country, and within every country, they also vary depending on the type of client. It’s complicated, time-consuming, and expensive for banks. And the cost, of course, is paid by the customers in the end.
- Liquidity costs. Cross-border payments need for Nostro/Vostro accounts to be funded, and that’s another high cost faced by banks of all sizes. It’s capital that’s just laying there, uselessly, waiting for a customer to request operation in which the currency of that particular account is useful. Keeping the books on these accounts is exceedingly complicated. And once some of that capital is used to serve the customer, it has to be replaced.
- Regulatory frameworks. Every bank must comply with its domestic laws. But it must also abide by the laws of the target country in each operation. That takes a lot of expertise from the bank, that must pass it on to each customer so that it can be understood if the transfer is legal or not in both the sending and the receiving jurisdictions.
- Lack of transparency. You never know when a transaction will be completed. Your bank doesn’t know either, because the system is very complex, so you always get an answer like “oh, in a few days, surely.” And the money has to go through so many intermediaries, each charging a fee, which you will also pay.
- Lack of speed. It’s slow. It can take several days, depending on the route, the amount, and the international partners each bank has.
- Reliance on a handful of big players. A small number of big banks dominates the market. So unless your bank is one of the world’s global giants, the chances are that you’re not going to get excellent service. They dominate the correspondent banking networks.
- Competitive pressure. There’s MoneyGram and WesternUnion. And now there’s PayPal too. These remittance services and fintech are quicker, cheaper, and safer.
Crypto to the rescue
Blockchain technology, especially the one that Ripple boasts, could revolutionize the industry for all parties involved. It will do this by solving all the problems described in the previous section. It will increase costs and transparency, eliminate almost all risks, bring the speed up drastically, reducing the friction between domestic and international payment networks.
In principle, a system like that could be built using any cryptocurrency available in the crypto-verse. Of course, more stable digital assets with high liquidity are preferable. But the one that’s been leading the way for years now is Ripple’s XRP.
From its very inception, Ripple has worked with full focus into solving the problem of international transfer. Unlike other cryptocurrencies which seek to become retail payments systems or ways to store wealth, Ripple aims to disrupt the traditional banking system by eliminating all the friction present in settling payments through SWIFT.
And it’s succeeding so far.
Ripple currently offers several software platforms and a native cryptocurrency (XRP) that can complete an international operation in seconds instead of days, and for a cost of pennies instead of a percentage of the transfer.
xCurrent is one of Ripple’s platforms. It’s essentially just a messaging system. There’s not much of a surprise here because the SWIFT system itself is also a messaging system. But SWIFT is so outdated that even a basic, but modern, messaging system can improve the customer experience by a lot. Also, because it doesn’t rely on cryptocurrencies and it’s vaguely similar to Ripple, the banks are not as reluctant to try it out.
xRapid is a lot more complicated but more promising as well. In xRapid the bank that’s sending money abroad uses its local fiat currency to go into the cryptocurrency market and buy XRP tokens. Those crypto tokens are then sent to the target which collects them in its wallet and then sells them to buy local fiat. The whole process takes seconds. Also, using XRP is not mandatory; the same procedure can be followed using some fiat currencies and other digital assets as well.
Ripple already has 200 customers in the banking and remittance industry, and a new one keeps joining the Ripple Net every week, on average. Some of the world’s larger banks, such as Banco Santander, are already using the technology at the production stage for settling payments.
The SWIFT system has been hindering the world’s banks for years. They simply can’t compete with remittance services or serve their customers well. Blockchain technology and distributed ledgers will give them the chance to become fast, cheap, safe, and competitive.
Of course, the banking industry has been slow to react. Bankers are usually very conservative, and they don’t like changes of any kind. But the writing is on the wall. Even the European Bank Association knows it, as it published in the paper, so it’s just a matter of time before the change happens. On the other hand, they’re always happy to lower costs as much as possible so, in the end, this is an offer that they just can’t refuse.
And when the banks finally embrace cryptocurrencies and blockchains to make their work easier, the chances are that Ripple’s technology will be leading the way along with its cryptocurrency, XRP.
Without many significant changes in the international payments industry, the banking system will be left behind in a market that’s snowballing, and in which the more aggressive competition is already adopting blockchain networks to do the job. Ripple is on the frontline.
Disclaimer: The presented information is subjected to market condition and may include the very own opinion of the author. Please do your ‘very own’ market research before making any investment in cryptocurrencies. Neither the writer nor the publication (TronWeekly.com) holds any responsibility for your financial loss.
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