The rise of the consumer Internet has challenged many industries. Now it is going after the seemingly old-fashioned, boring business of cross-border payments. Not all payments, mind you. Cross-border e-commerce payments, to be specific.
McKinsey Global Institute (MGI) says by 2020, some 940 million online shoppers will spend almost USD1 trillion on cross-border e-commerce transactions. Then there are companies such as Uber, Ola, Airbnb, who are remitting small payments across the world to their seller/driver partners.
Here is the challenge. The entire process of accepting and making multitudes of payments in different currencies is difficult. A bunch of companies is trying to offer new solutions for making and settling high-volume, low-value transactions in multiple currencies.
First Data launched its Global PFAC solution. It aims to authorise transactions in more than 150 currencies and make settlements in 17 currencies worldwide.
FedEx Cross Border is the result of a partnership with BlueSnap, which aims to facilitate sales in multiple languages, currencies, and payment types for online transactions.
The Society for Worldwide Interbank Financial Telecommunication, better known as SWIFT, the behemoth in this space, has global payments innovation (GPI).
The big question is: Why does the older system exist? Trust issues, that's why. As the money moves, it needs guarantors along the way to ensure that there is no settlement risk.
Thats is where Ripple comes in with its blockchain approach. It is point to point, instantaneous, and removes the settlement risk. The six-year-old startup is challenging the dominance of the 45-year-old SWIFT, which accounts for 50% of cross-border payment transactions.
The majority of cross-border payments is still carried out through wire transfers done via the SWIFT network. SWIFT works as a correspondent in a co-operative model consisting of 11,000 member banks and several intermediaries.
Cross-border payments also attract fees from the sender and receiver banks and foreign exchange rates (which are usually non-transparent), raising the total transaction cost by 10%-20%, with the average fee at USD35-USD40. Here's an example: An average Airbnb payment of USD250 would attract about USD40 in fees, making the low-ticket size transaction via traditional network uneconomical.
Ripple promises to change all that.
It makes cross-border payments faster and cheaper using blockchain technology. It is investing heavily in scaling its technology, and boasts 100 bank partnerships globally, with the list growing fast.
The India story
The number of Indian banks joining the Ripple network is equally impressive. Before delving deeper into what makes Ripple exciting for Indian banks, it is important to get a measure of the country's cross-border payments market.
According to a World Bank report, India was the largest remittance-receiving country in the world in 2017, with nearly 16.4 million Indians abroad sending home USD69 billion. Outbound remittances increased from USD8.2 billion in 2016 to USD11.3 billion in 2017.
Asheesh Birla, senior vice president of product at Ripple, tells ET Prime, “Three years ago, we took a trip to India and looked at the opportunity it offers. We decided to go deep, as it is the world's largest inward-remittance market.”
Axis Bank, Yes Bank, Kotak Mahindra Bank, and IndusInd Bank became Ripple’s first four clients in India. Navin Gupta, Ripple's managing director for South Asia and MENA, says discussions with other banks are on, and the company expects to make announcements on two top private banks joining its network soon.
Kotak Mahindra Bank went live on the Ripple blockchain network, called RippleNet, around three months ago. The bank is using Ripple's settlement solution XCurrent to power instant cross-border payments. XCurrent, an on-premise solution, takes about six weeks to be implemented. Traditionally, banks enter into one-on-one partnerships, each of which involves integration costs and maintenance, making the SWIFT service a costly affair for them. Depending on the country, banks may choose one or two partner banks as tie-ups with several players are not feasible, says Kotak Mahindra Bank's chief digital officer Deepak Sharma. “We found many exchange houses which are into retail remittance (individual-to-individual money transfer) on RippleNet (because in many countries, banks are not the cheapest and the most efficient option). So, this is the space where they (Ripple) are much stronger.”
Instead of worrying about one-on-one tie ups, an API (application programming interface)-based module connects all partner ecosystems, including banks, exchange houses, and those who are into the money-transfer business on one single platform.
Anybody who is on RippleNet will be able to start business immediately. Tie-ups between banks are required to open settlement accounts etc., but RippleNet can support the whole transaction flow, says Sharma.
Several banks in the US, North America, Europe, Asia, and West Asia are part of RippleNet, which gives Kotak access to more payment corridors, where till now the cost of transaction has been high because of lack of competition. Sharma believes in the corridors where this technology is enabled, the cost will come down by 20%-40%. A transition in phases
Kotak has moved a part of its cross-border transactions to the blockchain network and sees Ripple creating a new segment that will drive more inward retailflows for the bank — rather than replacing the incumbent network.
“For somebody using SWIFT, to go live on blockchain technology which is de-centralised would require significant infrastructure overhaul”, says Don Tait, blockchain analyst at IHS Markit. “It is an important thing to understand before comparing the two. Global banks such as JP Morgan Chase, Santander, [and] Bank of America adopting Ripple gives legs to blockchain technology. Having said that, you can't expect banks to completely move away from SWIFT to use blockchain. Once they get used to the new technology, they might move a certain percentage of their transactions to blockchain.”
Yes Bank, which will shortly go live on RippleNet, sees it as one of its strategic partnerships for the long term.
Yes Bank's chief information officer Anup Purohit says both SWIFT and Ripple will continue to co-exist in the foreseeable future, as the former caters to a broader set of banking transactions. SWIFT allows corporates and institutions who bank with multiple banks to connect into it via a unified ‘SWIFT for corporates’ proposition, whereas Ripple's proposition currently seems to be focussed more around the use case of retail remittances (as the transactions are pre-validated).
Retail remittance a sweet spot; e-commerce payments on wish list
Ripple, which claims that its technology can work for both retail as well as corporate flows (which, according to Juniper Research, is nearly USD150 trillion market globally), seems to have found its sweet spot.
Corporate flows are high in value, low in volume. On the other hand, retail flows being a volume game, error rates are particularly high. If millions of payments are coming to India, and some percentage of them get into the repair queue (rejected/failed/delayed due to some error), it causes a lot of dissatisfaction because there are thousands of people whose money has not reached them. But one corporate transaction that is of high value does not involve so many people.
Ripple's sweet spot is high volume, low value because that's where banks face problems and customer support cost is high, says Gupta.
But Birla wants to tap corporate payments as well. In terms of corporate cross-border payments, the fastest-growing segment is actually low-value e-commerce and SME payments, increasing 15%-20% y-o-y. In 10-15 years, mobile and e-commerce is going to be the biggest segment in cross-border payments, he says.
Ripple's XVia is a hosted solution for corporations. E-commerce companies and SMEs can use the XVia API to connect with RippleNet, which consists of banks and financial institutions that can process payments, enabling cross-border remittance.
After talking to payments and e-commerce companies and telecom operators, Birla says he found one thing that was common across: “SWIFT just doesnt work for them (it only targets banks).
Ripple plans to target companies like PayPal, Paytm, and other mobile-payments players to join its network. In the US, PayPal is big but that may not be so in India. Ideally, it should be like this: I send the money through PayPal, but my family in India, on Paytm, will still be able to receive it instantly. Our effort is to bring all these players on Ripple to make that happen.”
Scalability debate
SWIFT understands the challenges that the correspondent-banking model brings with it and is improving its efficiency. In order to fight the challenger, SWIFT last year launched global payments innovation (GPI), which enables sending and receiving money within 30 minutes. The upgraded service was being used by 150 banks as on February 2018, with ICICI Bank the first Indian bank to go live on GPI.
SWIFT claims that over USD100 billion in GPI messages are being sent every day, accounting for nearly 10% of its total cross-border payments traffic.
Interestingly, SWIFT completed testing blockchain technology earlier this year. The Brussels-based messaging system, which carried out the test with 34 banks, says things went extremely well, but it concluded that further progress is needed on the distributed-ledger technology, or blockchain itself, before it is ready to support production-grade applications in large-scale, mission-critical global infrastructures.
The test also showed there would be significant operational challenges to using blockchain for all its 11,000 members.
Birla says Ripple solved the scalability issue in 2016 by developing the inter-ledger protocol (ILP) technology, which allows partner banks to scale the number of transactions per second. For example: If Axis Bank wants more throughput, it can simply add more XCurrent installations as needed. XCurrent works a lot like the Internet as a point-to-point solution. For Indian banks, scalability is not as big an issue as it appears. Yes Bank's Purohit says blockchain technology is built for scale, but they will wait and watch adoption by customers and banks.
Adoption is a clearly a challenge because, according to Sharma, it took Kotak at least a year to join the Ripple network as they were also looking at the fact that there should be a minimum set of partners who can help them to grow the business. Without revealing the numbers, Sharma says Ripple has expanded their partner base over last 12 months.
Ripple minus its cryptocurrency
While Ripple is upbeat about XCurrent and XVia, which handle real-time messaging, clearing, and settlement of cross-border transactions, it is hesitant to talk about its third solution, XRapid, which is aimed at solving on-demand liquidity issues using its very own cryptocurrency, XRP.
In separate calls and meetings with ET Prime, Birla and Gupta say XRP is separate from Ripple, with the latter being a purely software company. The XRP cryptocurrency is independent of Ripple, which only uses it for XRapid. Both appear extra cautious because of the recent regulatory crackdown on cryptocurrency in India and abroad.
Birla agrees that messaging is one component of the problem. The other is liquidity. “One of the bigger problems for our clients is this: If someone wants to send money from Taiwan to India, how can they do it on mobile in real time. That's why we developed XRapid, which uses the digital currency, XRP, to transfer money real-time into a country without having to get a Nostro account with capital tied up,” he says.
About 10 financial institutions, including Western Union, MoneyGram, MercuryFX, IDT, and Cambridge Global Payments, are piloting XRapid. The service is currently available in the US and Mexico markets. According to Ripple, XRapid users are already witnessing savings of up to 30%-40% compared to other networks.
Birla believes that with time and awareness, regulation will move ahead to include digital assets.
McKinsey Global Institute (MGI) says by 2020, some 940 million online shoppers will spend almost USD1 trillion on cross-border e-commerce transactions. Then there are companies such as Uber, Ola, Airbnb, who are remitting small payments across the world to their seller/driver partners.
Here is the challenge. The entire process of accepting and making multitudes of payments in different currencies is difficult. A bunch of companies is trying to offer new solutions for making and settling high-volume, low-value transactions in multiple currencies.
First Data launched its Global PFAC solution. It aims to authorise transactions in more than 150 currencies and make settlements in 17 currencies worldwide.
FedEx Cross Border is the result of a partnership with BlueSnap, which aims to facilitate sales in multiple languages, currencies, and payment types for online transactions.
The Society for Worldwide Interbank Financial Telecommunication, better known as SWIFT, the behemoth in this space, has global payments innovation (GPI).
The big question is: Why does the older system exist? Trust issues, that's why. As the money moves, it needs guarantors along the way to ensure that there is no settlement risk.
Thats is where Ripple comes in with its blockchain approach. It is point to point, instantaneous, and removes the settlement risk. The six-year-old startup is challenging the dominance of the 45-year-old SWIFT, which accounts for 50% of cross-border payment transactions.
The majority of cross-border payments is still carried out through wire transfers done via the SWIFT network. SWIFT works as a correspondent in a co-operative model consisting of 11,000 member banks and several intermediaries.
Cross-border payments also attract fees from the sender and receiver banks and foreign exchange rates (which are usually non-transparent), raising the total transaction cost by 10%-20%, with the average fee at USD35-USD40. Here's an example: An average Airbnb payment of USD250 would attract about USD40 in fees, making the low-ticket size transaction via traditional network uneconomical.
Ripple promises to change all that.
It makes cross-border payments faster and cheaper using blockchain technology. It is investing heavily in scaling its technology, and boasts 100 bank partnerships globally, with the list growing fast.
The India story
The number of Indian banks joining the Ripple network is equally impressive. Before delving deeper into what makes Ripple exciting for Indian banks, it is important to get a measure of the country's cross-border payments market.
According to a World Bank report, India was the largest remittance-receiving country in the world in 2017, with nearly 16.4 million Indians abroad sending home USD69 billion. Outbound remittances increased from USD8.2 billion in 2016 to USD11.3 billion in 2017.
Asheesh Birla, senior vice president of product at Ripple, tells ET Prime, “Three years ago, we took a trip to India and looked at the opportunity it offers. We decided to go deep, as it is the world's largest inward-remittance market.”
Axis Bank, Yes Bank, Kotak Mahindra Bank, and IndusInd Bank became Ripple’s first four clients in India. Navin Gupta, Ripple's managing director for South Asia and MENA, says discussions with other banks are on, and the company expects to make announcements on two top private banks joining its network soon.
Kotak Mahindra Bank went live on the Ripple blockchain network, called RippleNet, around three months ago. The bank is using Ripple's settlement solution XCurrent to power instant cross-border payments. XCurrent, an on-premise solution, takes about six weeks to be implemented. Traditionally, banks enter into one-on-one partnerships, each of which involves integration costs and maintenance, making the SWIFT service a costly affair for them. Depending on the country, banks may choose one or two partner banks as tie-ups with several players are not feasible, says Kotak Mahindra Bank's chief digital officer Deepak Sharma. “We found many exchange houses which are into retail remittance (individual-to-individual money transfer) on RippleNet (because in many countries, banks are not the cheapest and the most efficient option). So, this is the space where they (Ripple) are much stronger.”
Instead of worrying about one-on-one tie ups, an API (application programming interface)-based module connects all partner ecosystems, including banks, exchange houses, and those who are into the money-transfer business on one single platform.
Anybody who is on RippleNet will be able to start business immediately. Tie-ups between banks are required to open settlement accounts etc., but RippleNet can support the whole transaction flow, says Sharma.
Several banks in the US, North America, Europe, Asia, and West Asia are part of RippleNet, which gives Kotak access to more payment corridors, where till now the cost of transaction has been high because of lack of competition. Sharma believes in the corridors where this technology is enabled, the cost will come down by 20%-40%. A transition in phases
Kotak has moved a part of its cross-border transactions to the blockchain network and sees Ripple creating a new segment that will drive more inward retailflows for the bank — rather than replacing the incumbent network.
“For somebody using SWIFT, to go live on blockchain technology which is de-centralised would require significant infrastructure overhaul”, says Don Tait, blockchain analyst at IHS Markit. “It is an important thing to understand before comparing the two. Global banks such as JP Morgan Chase, Santander, [and] Bank of America adopting Ripple gives legs to blockchain technology. Having said that, you can't expect banks to completely move away from SWIFT to use blockchain. Once they get used to the new technology, they might move a certain percentage of their transactions to blockchain.”
Yes Bank, which will shortly go live on RippleNet, sees it as one of its strategic partnerships for the long term.
Yes Bank's chief information officer Anup Purohit says both SWIFT and Ripple will continue to co-exist in the foreseeable future, as the former caters to a broader set of banking transactions. SWIFT allows corporates and institutions who bank with multiple banks to connect into it via a unified ‘SWIFT for corporates’ proposition, whereas Ripple's proposition currently seems to be focussed more around the use case of retail remittances (as the transactions are pre-validated).
Retail remittance a sweet spot; e-commerce payments on wish list
Ripple, which claims that its technology can work for both retail as well as corporate flows (which, according to Juniper Research, is nearly USD150 trillion market globally), seems to have found its sweet spot.
Corporate flows are high in value, low in volume. On the other hand, retail flows being a volume game, error rates are particularly high. If millions of payments are coming to India, and some percentage of them get into the repair queue (rejected/failed/delayed due to some error), it causes a lot of dissatisfaction because there are thousands of people whose money has not reached them. But one corporate transaction that is of high value does not involve so many people.
Ripple's sweet spot is high volume, low value because that's where banks face problems and customer support cost is high, says Gupta.
But Birla wants to tap corporate payments as well. In terms of corporate cross-border payments, the fastest-growing segment is actually low-value e-commerce and SME payments, increasing 15%-20% y-o-y. In 10-15 years, mobile and e-commerce is going to be the biggest segment in cross-border payments, he says.
Ripple's XVia is a hosted solution for corporations. E-commerce companies and SMEs can use the XVia API to connect with RippleNet, which consists of banks and financial institutions that can process payments, enabling cross-border remittance.
After talking to payments and e-commerce companies and telecom operators, Birla says he found one thing that was common across: “SWIFT just doesnt work for them (it only targets banks).
Ripple plans to target companies like PayPal, Paytm, and other mobile-payments players to join its network. In the US, PayPal is big but that may not be so in India. Ideally, it should be like this: I send the money through PayPal, but my family in India, on Paytm, will still be able to receive it instantly. Our effort is to bring all these players on Ripple to make that happen.”
Scalability debate
SWIFT understands the challenges that the correspondent-banking model brings with it and is improving its efficiency. In order to fight the challenger, SWIFT last year launched global payments innovation (GPI), which enables sending and receiving money within 30 minutes. The upgraded service was being used by 150 banks as on February 2018, with ICICI Bank the first Indian bank to go live on GPI.
SWIFT claims that over USD100 billion in GPI messages are being sent every day, accounting for nearly 10% of its total cross-border payments traffic.
Interestingly, SWIFT completed testing blockchain technology earlier this year. The Brussels-based messaging system, which carried out the test with 34 banks, says things went extremely well, but it concluded that further progress is needed on the distributed-ledger technology, or blockchain itself, before it is ready to support production-grade applications in large-scale, mission-critical global infrastructures.
The test also showed there would be significant operational challenges to using blockchain for all its 11,000 members.
Birla says Ripple solved the scalability issue in 2016 by developing the inter-ledger protocol (ILP) technology, which allows partner banks to scale the number of transactions per second. For example: If Axis Bank wants more throughput, it can simply add more XCurrent installations as needed. XCurrent works a lot like the Internet as a point-to-point solution. For Indian banks, scalability is not as big an issue as it appears. Yes Bank's Purohit says blockchain technology is built for scale, but they will wait and watch adoption by customers and banks.
Adoption is a clearly a challenge because, according to Sharma, it took Kotak at least a year to join the Ripple network as they were also looking at the fact that there should be a minimum set of partners who can help them to grow the business. Without revealing the numbers, Sharma says Ripple has expanded their partner base over last 12 months.
Ripple minus its cryptocurrency
While Ripple is upbeat about XCurrent and XVia, which handle real-time messaging, clearing, and settlement of cross-border transactions, it is hesitant to talk about its third solution, XRapid, which is aimed at solving on-demand liquidity issues using its very own cryptocurrency, XRP.
In separate calls and meetings with ET Prime, Birla and Gupta say XRP is separate from Ripple, with the latter being a purely software company. The XRP cryptocurrency is independent of Ripple, which only uses it for XRapid. Both appear extra cautious because of the recent regulatory crackdown on cryptocurrency in India and abroad.
Birla agrees that messaging is one component of the problem. The other is liquidity. “One of the bigger problems for our clients is this: If someone wants to send money from Taiwan to India, how can they do it on mobile in real time. That's why we developed XRapid, which uses the digital currency, XRP, to transfer money real-time into a country without having to get a Nostro account with capital tied up,” he says.
About 10 financial institutions, including Western Union, MoneyGram, MercuryFX, IDT, and Cambridge Global Payments, are piloting XRapid. The service is currently available in the US and Mexico markets. According to Ripple, XRapid users are already witnessing savings of up to 30%-40% compared to other networks.
Birla believes that with time and awareness, regulation will move ahead to include digital assets.
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