Banking & Payments
Ripple and what “the internet of value” means for finance
Ripple, payments, crypto, and the coming explosion in transaction volumes.
Sorry, Ripple: the world’s big global banks are just not into you – yet. When it comes to cross-border payments, they prefer to stick with correspondent banking, SWIFT, and the fees they justify by their infrastructure to make transactions happen.
Big banks, and their regulators, know the existing infrastructure works, or at least, it works well enough. SWIFTgpi, its program of digital refurbishment, delivers many of the benefits of blockchain without the hassle of integrating a new tech or dealing with crypto-currencies. Moreover, XRP, the digital token created by Ripple, confuses a lot of people and muddies Ripple’s other story as a blockchain enabler to payments.
But the iterative strategy implied by embracing SWIFTgpi may prove to be viable only in the medium term. It’s quite possible that within five years, there will be market consensus that blockchain must replace today’s payments infrastructure.
If money could talk
Ripple is thinking long term. “The big picture is we’re changing the nature of how value moves” across the internet, said Brad Garlinghouse, CEO, speaking this week at a company event in San Francisco. “The next few decades will see a dramatic reduction in friction in payments.” (DigFin paid its own way to attend.)
Money is fungible, but it’s not interoperable. Ripple’s argument is that the internet helps make data flow, and cargo containers (among other things) make commerce more efficient, but that finance remains fragmented and opaque. But if frictions in payments declines, it will lead to far more transacting, just as the internet led to an explosion in data and cargo boxes led to a mushrooming in global trade.
We’re changing the nature of how value moves
Ripple likens this to creating an “internet of value” as opposed to one of information. The company is not alone in this view.
R.J. Pittman, former chief product officer at eBay, says e-commerce will necessitate a change. Today e-commerce is only 9% of the U.S. retail market (versus 40% in China). Globally the average is around 15%, but Pittman expects this to increase relentlessly, as companies continue to find ways to remove friction for the customer. The existing payments infrastructure won’t be able to match it.
“We’re nowhere close to hitting critical mass in e-commerce,” he said. “If 15% is the global average, what happens when we hit 75%? Do we have the payments infrastructure in place to scale? And do we have the cost models in place? Because it’s going to become bitterly competitive.”
Although banks may think their status quo capabilities can grow, Pittman argues the opposite. “There are many inefficiencies in the payments processing chain,” he said. “Even a credit-card settlement in the U.S. is antiquated and costly.”
Moving money, moving value
So, the death of banks and credit-card companies?
“Quite the opposite,” Pittman said. “They should shed the legacies and open the aperture to extraordinary growth opportunities.”
He likens Ripple’s tech to the creation of TCP/IP protocols, which broke up messages on the internet (like an email) into batches and recreated them so that information could be processed efficiently. “Distributed-ledger technology can have a similar impact when applied to payments,” Pittman said. “TCP/IP, by moving packets of information, made the web work.” Ripple’s Interledger Protocol is TCP/IP for moving value, he said, obviating the need for many central services in payments today.
Do we have the costs models in place?
This message may not have permeated many in the banking world. Ripple commissioned research company Celent to survey 700 global company execs about payments. It’s just one survey, so banks should do their own research; surprise, surprise, the findings favor blockchain. But perhaps the most interesting finding was that most respondents from banks (17 percent of the group) thought their customers were happy with their service.
“Banks know there’s a need for change, but don’t realize how desperate their customers are,” said Alenka Grealish, senior analyst at Celent.
(Two other findings of note…
First, good news: cross-border payments are set to explode with Asia leading the way. Celent says in 2016 cross-border payments added up to $27 trillion – and will reach $47 trillion by 2026. Asia Pacific is leading the charge, with its slice to grow from $9.6 trillion to $18.4 trillion.
Secondly, bad news: today $10 trillion of corporate capital sits idle in pre-funding accounts. Banks earning a spread on that slush fund are going to find it increasingly difficult to keep a hold of that cash if Ripple and other blockchain providers catch fire.)
Celent says enough companies are putting blockchain into deployment around payments that we’re close to a tipping point. Companies, I.T. firms, fintechs, telcos, banks, and brokers are moving from experimenting to execution because they find blockchain improves speed, lowers costs, improves transparency, and increases connectivity.
That may not be all. More of these companies (especially non-banks) are interested in using digital assets in settlement, Celent says.
But there remain serious impediments, especially regulatory uncertainty, along with security concerns and a general lack of familiarity with the technology.
Banks don’t realize how desperate their customers are
The biggest challenge, and the one that regulators are grappling with, is the digital asset piece. Bankers have become fond of saying they love the idea of blockchain but won’t touch crypto with a ten-foot pole. This explains why R3’s Corda, for example, has been embraced for various bank-led projects: no tokens needed.
Ripple started out with a different approach in which it embeds XRP in its xRapid offering. A year ago, the company was positioning itself as a major disrupter, cheekily timing its annual conference to take place across the street from SWIFT’s own big event.
This year, Garlinghouse tried to present the company as a partner to banks; to bolster Ripple’s establishment cred, it populated the stage with regulators and paid Bill Clinton, a friend to investment banks, to give a keynote.
The payments use case for crypto has been undermined by last year’s speculative bubble. So long as the space is dominated by traders and the media-driven hype around trading, Satoshi Nakamoto’s original idea behind bitcoin as a payments technology gets forgotten. Volatility also negates any chance crypto has of going mainstream as a store of value.
But the company hasn’t backed off from its creation of XRP. It used its event to suggest XRP has a future, announcing the first actual deployment of companies using it as part of their cross-border payment activities.
Why bring in XRP or crypto at all? If R3 can put letters of credit on a distributed ledger, is there really a need for crypto in payments?
The company populated its stage with people like Pittman and Grealish, who argued that tokens play a role for blockchain to enable real, global peer-to-peer transactions that replace the SWIFT model of debits and credits that get reconciled across banks’ balance sheets.
Ripple has just gone live with its first use case of xRapid, the tech in which two or more parties transact using XRP as a bridge currency. Player A converts fiat to XRP and sends the payment to Player B, who converts out of XRP into her local fiat currency. Cuallix, a Mexican remitter, has just put this into production. Other companies such as Western Union are experimenting with xRapid.
The biggest message from Ripple’s event is that regulators are keen to find a way to handle crypto, and central banks are beginning to experiment with cross-border payments. And a few banks are plowing ahead with blockchain business models for payments. We’ll tell you more about those another day.