The size of the cross-border payments market continues to grow due to changing economic trends, migration, and an increase in international commerce. At present, banks dominate cross-border payments with a market share of 95 percent, but their money transfers are characterized by lack of transparency, high fees, and delays. These long-standing inefficiencies have opened the door to new players like Ripple, a fintech blockchain startup that uses cutting-edge technologies to provide innovative and customer-centric services to consumers and businesses. Fintech and blockchain solutions are changing the payments landscape and trying to solve the pain points or even replace the existing system.
So how are Ripple and its competitors – SWIFT and Western Union – solving the existing problems with cross-border payments? Could projects like the blockchain-agnostic GEO Protocol or IBM’s BWW, based on the Stellar blockchain, be an alternative?
The Cross-Border Payments Problems
Global payments encompass many different use cases such as correspondent banking, which dominates the current market, P2P remittances, disbursements, and the sharing economy. Today, international payments are viewed as inefficient because they have to be cleared by multiple banks across different locations and lack transparency on fees and certainty on whether the cross-border payment will even be delivered.
Small and large companies typically emphasize different problems with cross-border payments. Large corporations that make high-value international transfers are concerned about the lack of transparency concerning FX rates. Smaller businesses are concerned about access to services and high costs of sending cross-border payments.
Being costly, slow, and uncertain, traditional international payments don’t satisfy today’s global e-commerce demand for international cross-border payment systems that offer improved transparency, higher speed, and lower costs.
In response to these pressures, financial institutions are adopting new approaches to accelerate cross-border payments while increasing transparency and reducing operational costs. The global payments space is witnessing disruptive changes. Competition on the cross-border payments market is on the rise, but actually, there are two competing approaches to addressing these age-old issues: SWIFT’s gpi initiative and Ripple’s cross-border payments.
The Most Popular Cross-Border Payment Solutions
There are a number of key players within the current system who perform international money transfers around the globe.
SWIFT is a messaging system used by correspondent banks that enables financial institutions worldwide to send and to receive information about financial transactions. There are about 11,000 banks in the SWIFT network – a reach that no other global payments network can offer. SWIFT doesn’t transfer money but sends payment orders that must be settled by corresponding banks. The system is often criticized for high fees, low speed, and opacity.
To alleviate the pain points of cross-border payments in traditional correspondent banking, the company launched SWIFT gpi for corporate bank clients, which is faster than the firm’s existing system and offers end-to-end payment tracking and more transparent fees. SWIFT gpi offers payments within 30 minutes or 24 hours. SWIFT is also exploring blockchain technology and has launched a Proof of Concept as part of its global payment innovation initiative to help banks monitor and manage their nostro accounts.
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Western Union, a wire transfer system, is the giant of the global remittances industry. They have a network of about half a million retail agent locations and operate in more than 200 countries with access to a billion bank accounts. The Western Union platform can process about 32 transactions per second. The company has partnered with Ripple Labs to test Ripple’s cross-border payment tech XRapid.
Today, many banks and financial institutions are adopting blockchain technology, which has the potential to solve the pain points at the infrastructure level. Blockchain enables fast, secure, and low-cost cross-border transactions through the use of distributed ledgers. Such systems have no intermediaries like clearing houses and correspondent banks and ensure real-time verification of transactions. For example, MasterCard has also tested and validated blockchain. The company has opened access to its blockchain API for partner banks and merchants to address the challenges of transparency, costs, and speed in cross-border payments.
Meeting Rising Customer Expectations: Ripple Cross-Border Payments
Ripple is an open-source, distributed payment system that allows instant payments with minimal fees. Ripple uses a pathfinding algorithm to get a set of currency swaps that ensure the lowest possible fees for cross-currency transactions.
Ripple’s cross-border payments product for banks, xCurrent, doesn’t make use of Ripple’s native token XRP and can complete cross-border transactions in a matter of seconds with low operational costs. RippleNet, a decentralized global network of banks and financial institutions, combines payment messaging with funds settlement – the feature that was previously unavailable for cross-border transactions. Ripple’s customers are also allowed to keep their money in banks or other financial institutions. More than 120 banks and financial institutions have signed up to use xCurrent, and some of them are major international payment providers that operate in multiple countries. Ripple has announced partnerships with Banco Santander, American Express, USB, and many more.
Ripple is also trying to solve the problem of liquidity with its upgrade to the xCurrent system called xRapid. The system uses Ripple’s digital asset XRP as a bridge currency to replace all nostro/vostro accounts. With XRP, banks don’t have to open multiple accounts in different fiat currencies all over the world. Besides, XRP transactions take only seconds and require minimal human interaction. Ripple is trying to position XRP as a universal source of liquidity for all global money transactions. Many companies around the world are currently testing and using xRapid, including such notable partners as Cambridge Global Payments, Western Union, ITD, MoneyGram, Cuallix, Viamericas, Mercury FT, and Currencies Direct.
Ripple is based on the Interledger Protocol, which doesn’t require a global coordinating system or blockchain. The Interleger technology makes it possible to make cross-border transactions and ensures payment settlement, processing, and clearing. There is another project for decentralized P2P networks that can be used instead of the Interledger technology – the GEO Protocol. Being blockchain-agnostic and based on local consensus achieved by the parties that participate in the transaction, GEO Protocol can ensure real-time cross-border transfers of any kind of assets (both digital and physical that could be digitalized within the protocol). It’s important to note that there are no network fees for making transactions in GEO. It is a layer 3 solution, primarily aimed at solving the interoperability problem among all kinds of value transfer networks (both modern and traditional, as well as prospective).
Another alternative to Ripple is Blockchain World Wire (BWW) introduced by IBM. The new DLT-powered system operates on the Stellar blockchain. The company claims Blockchain World Wire enables simultaneous clearing and settling cross-border payments in near real-time. BWW is very similar to xCurrent in functionality. It reduces transaction costs by removing third-party intermediaries and substituting them with digital assets (low-volatility stablecoins) sent over a distributed network. The new financial rail can be easily integrated with existing payment systems through its API.
Blockchain technology has a great potential for improving the overall efficiency of cross-border payments, but today that potential remains largely unrealized and much progress is needed before distributed ledger technology will be able to support applications in large-scale mission-critical infrastructures.
Fintech has already taken a large market share from traditional banks and will play an undeniably significant role in providing financial services in the future. Banks will benefit from cooperation with technology providers like Ripple to optimize cross-border payments, reduce the risk of fraud, shorten settlement time, and speed up transactions.