At present, the payment transfer procedure between different countries is too slow, expensive and also dense. Ripple gives non-comparable well-priced payments that use an alternate of blockchain technology. Whereas, SWIFT has issued GPII, the same day credit of funds, upfront pricing and payment pursuing. This article will search the two solutions and also how the treasurers consider them.
At present, the age-old, 600-year-old correspondent banking system is being used for payments between different countries i.e. cross-border payments. This system has been made easy by SWIFT messages like MT101 and ISO 20022 payment instruction. Here six performers namely, payer, beneficiary, payer’s bank, beneficiary’s bank, payer’s bank’s correspondent and beneficiary’s bank’s correspondent are united.
It is time-consuming as the messages move one after the other, i.e. in an order and banks do not follow straight through processing (STP). Worse case is that banks are habituated of using our cash for quite a long period which can be considered similar to an authorized theft undertaken by the officials. The worst case is, when the banks through the network charge random or at times material deductions as lifting fees and in lieu fees, so we need to be thankful when we receive the money. I can see that payments between various countries are passing through networks with one or two fee deductions daily. Unfortunately, this is a normal thing.
In this modern age of Venmo and PayPal, where everything is so immediate or fast, this appears very old or primitive. Isn’t it strange that Amazon can send physical goods faster than banks sending a credit entry?
Ripple is upsetting this structure by its very quick cross-border payments with the finest pricing from its network. As the payments in Ripple are very immediate, they are able to eradicate the risk of credit and liquidity from the whole procedure resulting in less banking expense. Also, the Ripple network provides the best price for liquidity and exchange, it is more effective and the consumers are free from the extended bank rates.
Here the corporate gets the advantage of price and speed as well as the removal of settlement risk. There is no loss of corporate data in the payment messages because Ripple uses industry standard ISO and MT messaging and the members are joined directly and also multilaterally. The familiar fee structure and entire messages create better settlement rates.
Ripple is different from other financial technologies as it bank-centric because not the customers but banks are linked to the ripple network. This gives two advantages; firstly the customers already have faith in banks, so this proves a better option than to hand over your money to some unknown fintech. Secondly, officials are at ease with banks, so they will not discontinue Ripple as they may do with some other non-banking fintechs.
Even though Ripple is having its own currency code XRP, and is also a blockchain company, the payments between different countries i.e. the cross-border payments use only a division of this blockchain technology. To lock the messages through the Ripple network, it does not use a ledger, instead, it uses the consensual validation of encoded symbols i.e. hashes which called Inter Ledger Protocol (ILP).
Through ILP Ripple links the prevailing bank ledgers which reduce the obstacles to admission. Consequently, banks link their main systems to the Ripple network, just similar to the way they link their main systems to the SWIFT network.
In Ripple the whole procedure is done in no time, the Ripple process is a complete process which contains rich information exchange, provision for liquidity and exchange of currency. As against this, the traditional method gives marginal information, liquidity through correspondents and no exchange of currency and even takes hours or days incurring high costs.
Ripple carries out a mechanized prompt auction for liquidity provision and FX instead of using fixed correspondents, hence promising the finest price implementation. Banks can limit their appeals for quotation to the opposite parties corresponding particular needs as rating and regulatory standing including KYC and AML compliance. From the corporate treasury point of view, it is same as using an eFX platform to obtain quotations from several banks.
There are four main stages namely, get the quotation, accept quotation, submit sending payment and submit receiving payment. The last stage, submit receiving payment denotes that funds have been credited to the beneficiary’s account. This whole process occurs within seconds, so it can be said that it is faster, cheaper, more complete as well as less complex than the existing procedure.
SWIFT has launched their Global Payments Innovation Initiative (GPII). Influencing the existing SWIFT messaging and the correspondent banking which are considered to be the main support of the ancient cross-border payments system, GPII is mainly a set of rules to compel banks to give more sound performance, involving payment tracing and data to observe the loyalty of such newly designed rules. The rules are summarized in the service level agreement (SLA) which is to be signed by the banks to join GPII and this SLA rejects the banks from delays, float, and opaque charging.
SWIFT has developed an “observer” system through which the partner banks can observe the SLA submission of their partners. SWIFT has also made a payment tracker, which can show the payment’s progress which will be white-labeled by banks for their customers.
For banks, the SLA is mainly a profit-making challenge. The improved clearness will reduce their rent withdrawal. The tracker is a sort of a technical problem. Initially, it may seem difficult for few banks to track payments through their system, then to attain the necessary updates; it needs to creatively use MT199 free format messages. Though the out-dated SWIFT messaging is hypothetical, its execution is same as the new system.
Ripple vs GPII
Now there remain no doubt that Ripple gives a complete process and is faster and cheaper and the addition of FX releases the clients from the unreasonable board rates applied by the banks for cross-border payments. The auction procedure will give good rates and fees for banks and their clients. The speed and true fees structure will aid auto restoration opening new means to do business.
GPII is undoubtedly a development in the present state of affairs. Basically, it does not change the cross-border payments, as it is only an SLA having a tracker coated on the top of current banking activities. There is a risk factor that, in future banks will be facing more disturbances if they stick to GPII and not choose the Ripple option.
Table 1: Comparison between Ripple and GPII
|Speed||Seconds||Hours or days|
|FX||Best possible||Determined by bank board rate|
|Data||Full delivery||(Planned for version 2)|
|Technology||Ripple and ILP||SWIFT + new messages|
|Number of banks||45||80|
|Difficulty||Roughly equal||Roughly equal|
Care should be taken regarding the present condition of cross-border payments, as the existing cross-border payments are very expensive and slow and many times the bank rates are opaque and unreasonable. Certain measures are helpful as percentage fees, lifting fees and correspondent banking fees are unacceptable, cross-border payments should price US$5-10, the float is considered as theft and also board rates can be discussed.
Demand cross-border ACH (Automated Clearing House) from your bank, in case you have big volumes of low price cross-border payments. So by arranging a local low price payment in the beneficiary’s country, the bank can lower down the costs of cross-border payments. Certain ACH systems may cover the majority value of payments they accept which may restrict their usage for big commercial payments.
Rationality vs incumbency
In a balanced world, since Ripple is faster, cheaper and easy to implement, it is believed that Ripple will have fast growth than GPII. And as it lessens liquidity and credit risks because of prompt transfers, regulators should also select Ripple.
However, the question arises that do we live in a balanced world and also GPII holds the advantage of being incumbent? And as it is run by SWIFT and built on the current correspondent banking system, GPII looks less upsetting to banks.
Amidst all this discussion, the news that calls for celebration is that whosoever succeed, the cross-border payments will become cheaper as well as faster, and this will create hope in treasurers.