American Express and Santander have just announced their link up with Ripple to deliver same day cross border payments. The payments transfer from US American Express business accounts being completed the same day in Santander UK business accounts. They are able to do this through a blockchain facilitated by Ripple protocol (developed by Open Coin). Ripple is a cryptocurrency (a currency that can be used to purchase real goods and services) and a payments network in which currency is transferred. Originally, it was designed as a compliment to bitcoin; but now its uses are now being realised across other commercial environments, and it looks set to take the International Payments market by storm.
A blockchain uses digital ledger technology (DLT). In essence it is a decentralized ledger, where transactions can be recorded between a secure closed network of computers, which keeps data secure. Information is shared between computers in real time, which enables regular reconciliation of the financial position of the ledger. If this proves to be the success it is expected to be, then this technology will be available to all levels of currency exchange, enabling a much faster and more fluid exchange of payments (and to industries outside of money transfers).
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This could be good news for you
Same day completion will be welcome news for people who carry out regular international money transfers. If you read the many reviews of international currency providers and their customer’s experiences, those that report negative feedback, across all of the providers, are largely down to an international transfer that has not been completed in the timescales agreed. This has cost the customer money.
As customer services pick their way through the communications, to locate the missing transaction, or miscommunication that has occurred, exchange rates have moved out of their favour (you never hear of the ones where they have moved in their favour). If these payments could be facilitated through Ripple protocol, then given the closed nature of the computer network, it is possible to keep a real time view on the payment process, with the exchange completing that same day. It would also be quick to interrogate any issues that have occurred and why a payment has not completed.
So what does the future hold for currency payments?
A consortium of over 70 banks have created R3, which is working on developing a platform that will enable faster settlements of transactions and at a lower cost. They have recently reported that it has now developed a payments system that will allow international currencies, and future digital ones to be exchanged using its blockchain system. It is expected that other fintech start-ups will also be working to enter this space.
Christine Lagarde Head of the IMF (International Monetary Fund) recently addressed the “Future, AM Session - Independence Conference” detailing her view of the future for digital currencies and their associated systems. She believes that while they lack scalability now, further investment and innovation could see them becoming the new borderless currency. Lagarde believes that they are not to be dismissed, although the future should include a consideration that this new technology works for the benefit of all.
What could this mean for the whole currency payments industry?
Blockchain fills the gaps that exist between the banks’ current unique in-house systems. This is what makes it so difficult for quick integration. This is a significant step forward. For currency exchange providers competition is fierce across money transfers. It is a volume game, so adapting to the latest technology is one way to gain favour and attract more customers. There are small margins at play, in comparison to foreign exchange through the banking network and there are many foreign currency brokers operating in this space. There is a race to the bottom, where fees are concerned (particularly in UK).
Margins continue to be squeezed tighter to offer the most competitive rate over and above the interbank rate and drive volume. They will be watching this space to see how the service develops and how they can integrate it into their platform. Roll out will likely be contained to the larger common currencies, so expect combinations across AUD, EUR, GBP, USD and potentially Yen as the main same day currencies. Further down the line, it could be a very different story.
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Scalability is a question and will need development
This breakthrough is one bank operating peer to peer transactions with another. Further developments will need to be undertaken, to ensure that the system is capable of supporting the trillions of cross-border transactions that take place daily and the value of them.
In fact, Ripple is not completely free to use. It was developed with a small deduction, about the equivalent of 1/1000th of a cent, which is not actually kept by Ripple. This charge is designed to guard against someone putting through millions of transactions at once. Furthermore, it remains to be seen whether Ripple could sustain the number of cross-border transactions that would take place, without further development. So it may be a time yet before the individual is able to enjoy same day money transfers being completed. However, it is worth bearing in mind that Ripple was developed four years ago and now the technology has a different use. In terms of the application of DLT, this is a huge leap forward..
