• Formation of ”Global Payment Steering Group” by Ripple raises hopes for development of a cross-border payment network using blockchain technology 
• Ripple is progressing towards an efficient multilateral transactions model with a common set of standards 
• Pilots hold promise though the success in scaling the transaction volumes and management of operational issues by banks remains to be seen

Blockchain technology presents a promising road ahead in international payments with the emergence of new initiatives that bring notable efficiencies as well as remove friction in transactions. The key to future success is not only technology but also the ability to develop a collaborative network among banks. Ripple, a distributed ledger payment technology company, has set out to solve the inefficiencies of international payments to make them truly efficient, transparent and in real time. With a rising number of bank partners and investors, the company is gaining a unique position in the industry.

Ripple has come a long way since its launch four years ago in 2012. Following the announcement that it has raised $55 million in Series B financing, it recently publicised the creation of the first interbank group for global payments based on distributed financial technology. Bank of America Merrill Lynch, Santander, UniCredit, Standard Chartered, Westpac Banking Corporation, and Royal Bank of Canada are the founding members of the network, known as the Global Payments Steering Group (GPSG). CIBC will also join the GPSG as a new member. This is one of the strongest support groups for a blockchain technology company and is significant because these major banks are formulating policies and standards that will govern cross-border transfers using Ripple’s blockchain technology.

The company’s investors include Standard Chartered, Accenture, SBI Holdings, and SCB Digital Ventures, the venture arm of Siam Commercial Bank, among others, which have indicated their support.

The challenges
As an early entrant in exploring blockchain technology, Ripple faces unique challenges and opportunities. Dilip Rao, managing director for Asia Pacific, Ripple pointed out, “We tend to be about two years ahead of the market and people are trying to catch up with us. That is the advantage of being pioneers, which also means we have to play the part of an educator.”

“Over the past year, we executed many pilots to prove this technology. For the first time, we had a solution where payment details can be secured and transactions recorded on a shared ledger. The key challenge was achieving the scalability to manage thousands of transactions” he explained.

Ripple offers advantages compared to existing cross-border payment technology, which accounts to its rising popularity. It has a bi-directional messaging feature that allows banks to exchange and confirm payment information, such as real-time customer data, before executing a transaction, thereby increasing straight-through processing rates and reducing errors.

“Strategically, we now have the Interledger protocol (ILP). Through this protocol, ledgers that follow these standards can then talk to each other and this offers distinct advantages. Firstly, the transactions are now completely private. Secondly, to validate transactions, we only need parties who are in the transaction to manage its validation. This solves not just interoperability but also the challenges of scalability and privacy. It is a pure bank to bank transaction - private, scalable and yet having the bi-directional messaging capability. Not just that bank A can send funds directly to bank B, but bank A can also send via correspondent A, correspondent B to the recipient bank. It is a multilateral transaction where the information is shared at the same time with all the parties while completing their own compliance checks. Over the last year, we have been working with several Asian banks on this model,” added Rao.

Strategic partnership
The GPSG raises hopes for the foundation of a new payments network. Using Ripple’s technology and through collaborative efforts, it can develop a common set of standards that will be integral for any international payment. This network also facilitates Ripple to seek legal and compliance assistance from member banks. Banks are now experimenting successfully to transmit cross-border funds in less than 10 seconds. The other initiatives such as SWIFT’s new global payment innovation proposal promise same day funds availability but not in real time. The trials are proving to be successful but whether this technology is effective in scaling-up to thousands of transactions has yet to be seen.

While technology develops, Ripple continues to work with banks to address the requisite operational issues and standards that are essential to drive this forward. “Working with six founding banks called the Global Payments Steering Group (GPSG), we have developed a 70-page framework which covers the technology, payment rules, exception handling and messaging standards. The GPSG has declared that it would be opening the network for more banks to join in the fourth quarter. We are creating an entity with which banks can contract. This entity would not be running any infrastructure but just establishing rules and obligations for payment across the network of banks and we expect it will continue to increase access and reduce costs,” he explained.

Managing risk
The experiments of transferring funds from one bank to another have proved to be successful though there are operational issues that need to be ironed out, before this technology is ready for a mass-scale adoption. Interestingly, the solution is designed to comply with the bank’s risk and compliance requirements and built to fit within the bank’s technology infrastructure.

The banks would need to continue to manage counter-party risk and regulatory compliance requirements, such as “Know your customer” (KYC) and anti-money laundering reporting. Ripple is positioning itself not as a participant in a financial transaction but as a software vendor. However, it has started briefing various regulators about this technology to seek their views.

“In general, regulators welcome this technology, which reduces the overall cost and makes it easier for small banks to compete with large banks. For example, in the old world, if you want to conduct a transaction in a country, you need to have a Nostro account but small banks can’t have these Nostro accounts across 100 countries. With Ripple, you only need Nostro accounts in selected countries. Furthermore, banks can now know their balances in different Nostro accounts, and that in real time too. The correspondent banks will have more transparency and control on payments going through them as well,” Rao added.

Ripple’s technology enables banks to transact directly with each other across borders and at a very low cost. Correspondent banking model intrinsically can be expensive as banks need to manage liquidity, open accounts and meet global regulatory compliance requirements. Ripple however claims that it can offer more efficient liquidity to banks for transactions through third party liquidity providers.

“There is a lot of ASEAN trade but a key problem is that many transactions from one currency to another are done through US dollars, due to lack of currency liquidity. This costs money and exposes banks to USD volatility. But technology, like Ripple’s digital asset XRP can allow you to have liquidity in a particular currency easily and cost-effectively. Also, banks in Thailand with deposits in baht can make their liquidity available to other banks at a margin even though they are not correspondent banks,” explained Rao.

The way forward
Ripple’s blockchain technology holds promise for the future as it comes with unique advantages. The formation of GPSG has given it new significance, though the network of banks is still relatively small and would need to grow substantially to make a notable inroad into global payment system.

With more bank partners, Ripple hopes to bring an important change in the global payment landscape in the next few years. However, large-scale operational adoption will take some time as technology need to be scaled-up while banks explore the network further as well as seek to understand and manage the underlying operational considerations.

Categories:

Financial Technology, Innovation, Payments, Retail Banking, Technology & Operations

Financial Technology,Innovation,Payments,retail,technology,

Financial Technology,Innovation,Payments,Retail Banking,Technology & Operations,

Keywords:Ripple, Blockchain, GPSG, Payments, KYC