How Ripple could be used by banks to make international payments faster, cheaper, and more transparent?

Ripple banks

Ripple’s perception to utilize IOV (Internet of Value) for financial means in a similar way it is used to trade information over the web. It is a real-time net settlement framework that supports all fiat, commodities, and digital currencies for exchange and providing remittance. Ripple in the crypto network, abbreviated as XRP is one of its kind that can operate and function across multinationals due to its shared ledger system and thus we can have faster banking with Ripple.

Due to its unique capabilities and settlement structure, Ripple (XRP) in the past few months can be seen increasingly adopted by banks, financial institutions, and payment networkers because of its high speed, stability, less expensive, and the ability of it being used as a bridge currency.

Creation of Ripple (XRP)

To understand the Ripple entrance and transgression in the banking industry we need to go inside its roots of existence.

Ryan Fugger, in 2004, developed “Ripple Pay”, a decentralized payment platform and protocol that can work with and without banking networks in a peer-to-peer sharing system.

In 2011, Britto, McCaleb, and Schwartz together created “XRP Ledger” an alternative system to optimize peer-to-peer transactions wherein they found the weakness in the Bitcoin (BTC) platform which can eliminate the risks of attacking the platform by 51%.

Over the next few years, USD 9 Million in funding was secured, making 2004 Ripple Pay re-named as “Ripple Labs Inc.” in 2013 and making the source code public to ensure the project is maintained and run by the community and developers.

How Ripple Works and Contributes?

Ripple is powered and processed through institutional gateways, unlike any other Blockchain technology which is secured by its decentralized mining networks used to validate and generate new token or currency. Ripple is protected by an internal ledger having its server of validation that guarantees transactions based on consensus. It is just like any payment processor and currency which uses XRP as its cryptocurrency. This is how Ripple works and contributes to the payment processes.

In 2014, various banking and payment institutions signed up to use Ripple in beta testing, after which an increasingly high adoption can be seen within the industries.

Ripple offers two main facilitators for cross-border transactions:-

  • xCurrent – Ripple’s one of the most adopted and longest available facilitators which is used as a real-time net settlement system to clear and settle transactions with a speed of just a click, thus disrupting the existing framework for payments like SWIFT which settles any amount in few days on an average.
  •  xRapid – Ripple’s rapid framework designed to eliminate the need for the physical/online accounts, thus sourcing liquidity from the market wherein buying XRP for fiat currency at one end, only to sell it in fiat at the other end. This Ripple facilitator has enabled several opportunities in the market embarking savings on payments (in terms of allowing international transactions with minimal fees) to opening the market for new opportunities thus eliminating the need to have Vostro accounts for high fees international transfers.

How RippleNet conjointly work with the Global Payment Network of Banks?

RippleNet, a decentralized single global network (agreement between XRP and its network participants) of banks that send/receive transactions via Ripple’s distributed ledger, providing real-time settlement of payments.

Banks from RippleNet benefit with its robust technology, connectivity, and standardization of data with each token transaction. This digital transition through Ripple’s financial technology outperforms all the banking infrastructure through low costs, high-speed settlement, and end-to-end visibility into a payment mechanism.

Features of RippleNet [ERIL Approach]

  • Everywhere (Reach and expansion through the offering of products across the globe)
  • Reliable (Building Trust through a transparent visible network, thus eliminating payment failures)
  • Instant (Provides real-time instant settlement wherever and whenever required)
  • Low Cost (Low fees and cost-efficient due to its distributed robust network)

Ripple for the banks, not against the banks

In the era of modernization and instant connectivity, various banking institutions are still using technology developed in the 1970s to conduct payments. For a $155 Trillion market, banks charge high processing fees for cross-border payments and take days to process. As a result, the global banking system has not advanced at the same pace as technology. Reducing the international fees and instantaneous settlement could result in an explosion and disruption in the globalization of banking institutions and payment processors.

While banks surely enjoy filling up their pockets with hefty fees and slow settlement, the Vostro accounts and use of third party gateways and banks take days to approve in the fiat’s currency due to regulations and laws surrounding cross-border payments. Unlike Bitcoin, which has the ultimate goal to eliminate intermediary banks. For Ripple, banks are the most significant users. Ripple’s ultimate goal is to make money move in faster, cheaper and at a pace, that information does in this digital age.

Instead of competing against the current banking giants, XRP plans to partner with the globe’s leading financial institutions to offer a Blockchain solution. According to Ripple, a member of its network will be able to process client’s payments worldwide instantaneously with ease and in a cost-effective way. Instead of converting fiat currency to other accepted currency while taking in conversion charges, margins, and transaction time. Bank 1 can transfer 10 million dollars of XRP to Bank 2s Ripple network, which can then be converted into local currency, thus providing a fast and affordable payment platform to businesses and partners out there.

“It costs about 2.9% to make an international transfer with PayPal, while Ripple is for banks like the internet is for the world which takes 0.02% to get a cross-border transaction settled.”

Potential Global Savings of USD 16 Billion

With the help of the Blockchain platform for cross-border transfers, people are still skeptical about digitization in the global economy. According to Ripple, remittances of middle-income countries make up USD 450 billion per year from total valuation of USD 600 billion. For transferring this money through international borders, people pay almost USD 30 billion in fees. The global average cost for sending remittances was 8% in Q4 2019.

The issue of high remittance has grabbed the attention of the G8 countries since 2009. The leaders and intellectuals of the world’s most powerful economies came up with a conclusion that remittance fees should be lower than 5% – which has still not happened as of 2020.

Ripple claims that usage of the Blockchain platform could cut down fees by more than half. Services like xRapid could lead to savings of USD 16 billion/year.

International Transfers will become “a matter of minutes”

Not only will the cost of international money transfers go down with the implementation of Blockchain but transactions will also become faster, going from 3-5 days to a matter of minutes. Traditional wire transfers are processed in working days only. Moreover, one needs to ask for the transfer before a certain time for the payment to be processed on the same day. Ripple facilitators will enable financial institutions to move money more efficiently, thus providing a frictionless experience for both remittance providers and final consumers. The service won’t just benefit banks, but also the payment service providers.

In 2019, Ripple Network stated that “banking institutions that implemented XRP for the remittance between the US and Mexico needed not more than two minutes to complete an xRapid payment and registered savings of 40-70%.”

Conclusion

With Faster banking with Ripple & the Blockchain will the banking industry revolutionize?

Blockchain in recent years has embarked on popularity in the digital arena. It is expected to disrupt and revolutionize the entire banking sector in the next 5 years due to its eye capturing features like peer-to-peer transaction, low cost, real-time transfer, and cross-border transfers. Currently, banking institutions worldwide use Society for Worldwide Interbank Financial Telecommunication (SWIFT) to facilitate cross-border payments securely.

10,000 SWIFT member institutions transfer approximately 24 million strings on the network every day. Point to note here is that SWIFT itself does not hold any monetary value for the banks. It just acts as a communication channel, and that too a very important one since a large number of international trade relies on it. The major issue with SWIFT is that it has not changed much since its inception in 1974. So, Ripple is trying to bring about the change that SWIFT has failed to do.

According to the latest report by S&P Global Market 2020 Ripple (XRP) network is already backed by over 100 financial institutions from all around the world out of which 38 banks are linked with the Ripple which includes names like American Express, Santander, Standard Chartered, Japan Post Bank, Royal Bank of Canada, HSBC, UBS to name a few. Besides this Ripple network has a target to be partnered with more than 300 global banking giants in more than 40 countries around the globe.

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