Related News

Swift says CBDC testing for trade payments showing positive results

GSBN, Cosco complete blockchain-based biofuel certification pilot

Dollar alternatives not a major illicit finance threat, US says

Mitigram hires Swift’s Scheiman

MonetaGo sets sights on “trade finance OS” with beefed-up board

Swift may be moving towards real-time payments, but it does not solve the problem that banks today have trillions of dollars parked in pre-paid nostro accounts around the world.

That’s according to Navin Gupta, managing director for Southeast Asia and Mena at Ripple, who was speaking today at Sibos, a financial services event hosted by Swift.

Responding to an audience question about whether there is still a value proposition for Ripple, a provider of blockchain-based payments, in light of Swift’s work to bring real-time payments to the market, Gupta said:

“People are looking at making things faster in their existing correspondent bank network, but nobody is taking away the need for pre-funded accounts. That’s the fundamental value proposition that we are discussing today.”

The question about Swift’s ability to innovate has been subject to debate for years. Swift, a bank-owned network founded in 1973, is the system that most banks use for their cross-border payments today. The challenge for Swift, however, is that it is only a messaging system. It means bank members can use Swift to make payment orders, but the actual transfer of funds is made from a pre-funded nostro account that a bank has with a local correspondent bank.

Swift has attempted to innovate its offering, for example by releasing its global payment innovation (gpi) service, which guarantees payment within 24 hours, as well as launching real-time payments through domestic payment networks.

However, Gupta argued, such improvements in speed don’t change the fundamentals of the correspondent banking system, which is that banks need to hold capital in nostro accounts. He referred to this as the “liquidity problem”, adding that it is a “misconception” that this will be addressed simply because current initiatives are making payments instant.

“Our guess is that there is about US$5-10tn that is stuck in pre-funded accounts around the world,” he said. “This is money which the originating bank has to keep with the beneficiary institution to be able to make the pay-outs. If this US$5-10tn were to be redeployed back into the home economies can you imagine what effect it can have? When we speak with central banks, they love it.”

Gupta made the comments as he was presenting Ripple’s cross-border payment solution xRapid in the ‘innovation theatre’ at Sibos.

xRapid, which was made commercially available in October last year, uses cryptocurrency (or a ‘digital asset’ as Ripple likes to call it) to enable banks to source on-demand liquidity in a foreign country. It means banks are not required to have correspondent relations and hold capital in nostro accounts

Specifically, xRapid uses XRP, a cryptocurrency created by Ripple, as a ‘bridge’ between fiat currencies. Using xRapid, a US bank, for example, transfers dollars into XRP via an exchange, and sends the XRP to an exchange in, say, Mexico. On the other end, the XRP is then converted into pesos. It all happens within minutes and at a lower cost than traditional methods, which typically see similar transfers take days and incur high foreign exchange fees.

Ripple’s xRapid is today used by more than 20 financial institutions. This is compared to the approximately 200 users of its first product, xCurrent. While xCurrent is also based on blockchain technology, it is, like Swift, a payment messaging system only.

 

Ripple vs Swift

It’s not uncommon for Ripple to criticise Swift – after all, the technology startup is seen as Swift’s biggest blockchain rival because it is selling its solution directly to banks.

In August last year, Ripple’s director of joint venture partnership Emi Yoshikawa claimed that Swift’s gpi is “just a marginal improvement” on “very old architecture”.

It followed Ripple’s decision two years ago to host a rival event to Sibos, which it called Swell, at the same time, in the same city (Toronto). At the time, Ripple was accused of aggressively hijacking the Swift event, with one media describing Swell as a “Sibos-killer”. A fleet of Ripple-branded cars were parked outside the Sibos venue throughout the week, ready to ferry people back and forth between the two events.

More recently, however, Ripple has adopted a more diplomatic tone towards Swift. Speaking to GTR in an on-stage interview at the Blockchain Summit in London in June, Ripple’s head of global banking Marjan Delatinne, who has previously worked for Swift, said the two are not competitors, but “can be very complementary”.

“We are not replacing Swift, as Swift has its own value,” she said.

The fact that Ripple is even present at Sibos this year might be a further indication that the Ripple-Swift relationship is warming up.

When asked by GTR what prompted Ripple to change its approach and take part in Sibos (with an exhibition stand as well as a speaking slot in the formal programme), Gupta declined to answer, saying:

“That’s not the subject for today.”