FX International Payments
By Mike Faden
Accordingly, SWIFT faces growing competition, chiefly from Ripple, a financial-technology (fintech) blockchain startup that promises to complete inter-bank cross-border payment transfers in seconds. At the same time, SWIFT is working to accelerate payments over its own network with the SWIFT global payments innovation (gpi) initiative, which promises same-day cross-border transfers, transparent fees, and payment tracking.
This article examines the existing problems with cross-border payments and compares Ripple cross-border payments with SWIFT gpi.
Cross-border payments mostly travel via the centuries-old correspondent banking system, in which chains of banks move payments from the payer's account to the recipient. The inter-bank electronic messages that initiate and support those payments in modern times are defined and relayed by SWIFT, the bank-owned Society for Worldwide Interbank Financial Telecommunication, founded in the 1970s.2
A key advantage of the SWIFT network is that it is ubiquitous: more than 11,000 financial institutions use the service worldwide in more than 200 countries and territories, making it possible to transfer money to and from practically every country.3
However, SWIFT cross-border payments via the correspondent banking system are generally regarded as slow, often taking days to complete. It is also hard to track progress and determine whether the money has been received, and payments often require manual intervention by banks, according to Rethinking correspondent banking, a 2016 McKinsey & Co. report.4
Furthermore, the cost is relatively high and can be hard to predict because banks along the payment chain often make "arbitrary and often material deductions" about which the payer may not be informed in advance, as David Blair, Managing Director at Acarate Consulting Singapore, wrote in Treasury Today.5 In an email interview, Blair said that faced with increasing competition, some banks are offering another lower-cost, though potentially slower option: cross-border ACH at prices competitive with fintech cross-border payment service providers.
Yet, according to Rethinking correspondent banking, banks until recently had little incentive to innovate, due in part to a lack of competition – particularly since B2B cross-border payments generate much higher profit margins than domestic payments.6
Now, however, customer expectations for cross-border payments are rising, due to factors such as the proliferation of real-time domestic payments services and the growth of e-commerce. At the same time, banks face increasing competition from fintech innovators offering low-cost international payments. Banks' costs are also rising due to regulatory initiatives such as Know Your Customer (KYC) and Anti-Money Laundering (AML) rules, according to McKinsey's Global Payments 2016 report.7
Thus, as the correspondent banking report notes, banks need to make cross-border payments cheaper, more transparent and more efficient.8 Another McKinsey analysis also published in 2016 found that to remain competitive, banks must dramatically reduce their operating costs for cross-border payments, from an estimated $25-$35 to as low as $1-$2.9
In response to these pressures, banks are adopting new approaches designed to accelerate cross-border payments while reducing cost and increasing transparency. Today, experts say there are two primary competing initiatives: Ripple cross-border payments and SWIFT gpi.10
Ripple's cross-border payments product for banks, xCurrent, offers an alternative to SWIFT for moving payments between banks and payment providers in different countries. Ripple describes xCurrent as a global real-time gross settlement (RTGS) system – the same label the world's central banks use to describe their own settlement systems. But each nation's RTGS settles only its own currency; Ripple's ‘global' RTGS settles multiple currencies. It uses blockchain (distributed ledger) technology and real-time messaging to enable cross-border payments that are claimed to settle in seconds within the network of financial institutions using Ripple's software, which the company calls RippleNet.
As of April 2018, Ripple said it had signed up more than 100 financial institutions, compared with SWIFT's more than 11,000. However, the companies using Ripple's cross-border payments software include some major international payment providers operating in multiple countries as well as domestic banks, so it's coverage is broader than indicated by simple numerical comparison.11,12
Participating financial institutions typically install xCurrent behind their firewall. xCurrent includes the distributed ledger used to record transactions as well as messaging and payment validation software, according to Ripple. xCurrent also includes a rulebook designed to ensure operational consistency and legal clarity for Ripple cross-border payments.13
Ripple cross-border payments may involve correspondent banks. Using xCurrent, the financial institutions involved in the payment send messages to each other in real time to confirm payment details prior to initiating the transaction, and to confirm delivery once it settles. The payer's bank initiates the process by using Ripple's messaging to gather the required information, including a quote for all fees charged by each bank in the chain, as well as the FX rate. This lets the payment provider inform the customer in advance about the total cost of sending the payment, in contrast to the fee uncertainty associated with traditional bank-initiated cross-border payments.14,15
Ripple's software then places a hold on the funds at the banks involved, and updates each bank's ledger to execute the payment; the company says the settlement process completes within seconds. The company also says that because the ledgers are updated simultaneously in a Ripple cross-border payment, settlement risk is eliminated.16
SWIFT gpi, launched in 2017, is intended to provide same-day cross-border payments, end-to-end tracking, and greater cost transparency. Though SWIFT gpi uses the traditional SWIFT messaging network, participating financial institutions sign up to a new service level agreement, which commits them to end-to-end same-day processing of payments and up-front transparency of fees. Another key feature is a cloud-based tracker that enables banks to monitor the status of the payment as it moves along the correspondent banking chain and eventually reaches the recipient's account.
In February 2018, about a year after launch, SWIFT said that gpi was delivering hundreds of thousands of business payments daily, representing 10 percent of its international payment volume and more than $100 billion in value each day; nearly 50 percent of payments were credited in less than 30 minutes, and nearly all within 24 hours.17 SWIFT said that 150 banks around the world have signed up to use the service, and volumes are expected to continue to grow rapidly.18
Experts say that whether financial institutions adopt Ripple cross-border payments or SWIFT gpi, the outcome may be positive for businesses. As Acarate's Blair wrote in Treasury Today: "The good news for treasurers is that whoever prevails (or if they co-exist), cross-border payments will get faster and cheaper – and that is worth celebrating and encouraging."19
Mike Faden has covered business and technology issues for more than 30 years as a writer, consultant and analyst for media brands, market-research firms, startups and established corporations. Mike also is a principal at Content Marketing Partners.
1. “SWIFT history,” SWIFT; https://www.swift.com/about-us/history
3. “About Us,” SWIFT; https://www.swift.com/about-us
4. Rethinking correspondent banking, McKinsey & Co.; https://www.mckinsey.com/~/media/McKinsey/Industries/Financial%20Services/Our%20Insights/Rethinking%20correspondent%20banking/Rethinking-correspondent-banking.ashx
5. “Ripple vs SWIFT: payment (r)evolution,” Treasury Today; http://treasurytoday.com/2017/07/ripple-vs-swift-payment-r-evolution-ttpv
6. Rethinking correspondent banking, McKinsey & Co.; https://www.mckinsey.com/~/media/McKinsey/Industries/Financial%20Services/Our%20Insights/Rethinking%20correspondent%20banking/Rethinking-correspondent-banking.ashx
7. Global Payments 2016: Strong Fundamentals Despite Uncertain Times, McKinsey & Co.; https://www.mckinsey.com/~/media/McKinsey/Industries/Financial%20Services/Our%20Insights/A%20mixed%202015%20for%20the%20global%20payments%20industry/Global-Payments-2016.ashx
8. Rethinking correspondent banking, McKinsey & Co.; https://www.mckinsey.com/~/media/McKinsey/Industries/Financial%20Services/Our%20Insights/Rethinking%20correspondent%20banking/Rethinking-correspondent-banking.ashx
9. Global Payments 2016: Strong Fundamentals Despite Uncertain Times, McKinsey & Co.; https://www.mckinsey.com/~/media/McKinsey/Industries/Financial%20Services/Our%20Insights/A%20mixed%202015%20for%20the%20global%20payments%20industry/Global-Payments-2016.ashx
10. “Ripple vs SWIFT: payment (r)evolution,” Treasury Today; http://treasurytoday.com/2017/07/ripple-vs-swift-payment-r-evolution-ttpv
11. “Start-up Ripple has over 100 clients as mainstream finance warms to blockchain,” CNBC; https://www.cnbc.com/2017/10/10/ripple-has-over-100-clients-as-mainstream-finance-warms-to-blockchain.html
12. “Japan Bank Consortium Moves to Become Production-ready,” Ripple; https://ripple.com/insights/japan-bank-consortium-moves-become-production-ready/
13. “Process Payments,” Ripple; https://ripple.com/solutions/process-payments/
14. Solution Overview, Ripple; https://ripple.com/files/ripple_solutions_guide.pdf
15. “How Ripple Works,” Ripple; https://ripple.com/solutions/process-payments/
16. xCurrent product Overview, Ripple; https://ripple.com/files/ripple_product_overview.pdf
17. “SWIFT gpi reduces cross-border payment times to minutes, even seconds,” SWIFT; https://www.swift.com/news-events/press-releases/swift-gpi-reduces-cross-border-payment-times-to-minutes_even-seconds
19. “Ripple vs SWIFT: payment (r)evolution,” Treasury Today; http://treasurytoday.com/2017/07/ripple-vs-swift-payment-r-evolution-ttpv