Over the last 5 years, there has been a silent war being waged in the finance industry between a corporate David and Goliath(s). Fighting over international bank transfers Ripple comes onto the finance stage to challenge the monolith SWIFT. The start-up company had modest beginnings in the early 2000s and has shown great adaptability and monumental effort to topple the SWIFT giant. Many are now saying that tides have turned to favour Ripple.
What is Ripple?
The start-up Ripple began way back in 2004 and was originally called “RipplePay” from 2004-2012. It had the same mandate today as it did back then, to be an international payment platform to replace the need for banks between individuals and business via a distributed ledger. Although back then even Bitcoin did not exist (not until 2009 at least). RipplePay adopted Bitcoin as a payment method in 2012 after Bitcoin started gaining traction in 2011 and also because RipplePay’s idea of a trustless-peer-to-peer payment and lending platform with fiat was not working out well.
Then in January 2013, Ripple launched the XRP token, a cryptocurrency akin to Bitcoin, but with some major differences (i.e. PoC vs. PoW). XRP was one of the first altcoins, even older than Ethereum (founded 2015). Since they found that people did not trust each other with IOUs and lending on their original platform, and Bitcoin was used more easily, so they developed their own cryptocurrency to allow for trustless peer-to-peer (P2P) settlement of transactions.
In addition to XRP, Ripple developed a technology called “Ripple Net”, which is a communication platform that utilizes the XRP token to settle transactions. Ripple Net consists of three components: xVia, xCurrent and xRapid (XRP), which together allow for the simple transfer of value as easily as the transfer of information on the internet.
Money can be sent as easily as a text message. To anyone in the world. Without a bank intermediary. You can do this with Bitcoin and other cryptocurrencies as well. So what makes Ripple different?
In 2015 Ripple was fined and investigated for violating the Bank Secrecy Act “by selling XRP without obtaining the required authorisation”. I guess that’s an indirect acknowledgement that XRP is a valid form of value transfer/currency… Anyway, Ripple agreed to a fine and remedial measure. The Ripple team took this seriously. Today, Ripple is the most transparent cryptocurrency company with the greatest adherence to AML/KYC and pro-regulatory stance. Ripple is working with the banks and government to bring them into the cryptocurrency space.
Ripple has become a champion of regulation and bridging the cryptocurrency and government gap. Rather than replace banks, Ripple acknowledges that banks will likely continue to exist despite the cryptocurrency movement and that it will target banks (and institutions) as customers for its payments and settlement platform.
How did banks and large corporations/institutions settle payments before Ripple? Answer: SWIFT.
What is SWIFT?
Founded in 1973, it began as a consortium of (239) banks from 15 countries who banded together to solve the issue of international bank transfers. The Society for Worldwide Interbank Financial Telecommunications (SWIFT) is a one-way messaging network that allows banks and institutions to securely transmit information regarding bank transfers/payments. It went live in 1977 and has been the main inter-bank secure messaging service ever since.
Today SWIFT has over 11,000 banks and institutions in their consortium in 200 countries and transmits over 24 million messages daily. It is the dominant interbank messaging system that allows for vast amounts of money to flow every day.
SWIFT is often criticised for its archaic system of delayed money transfers (3-5 business days, often taking much longer, up to a few weeks). It claims to be a messaging service only and that the banks are responsible for the delayed payments, as once each bank receives a “message” from another bank about a money transfer, they must forward it (if not the final destination of the money) or move the money if they are the final destination.
This may all sound confusing because it is. SWIFT is a messaging service for a convoluted tangle of banking relationships and clearing houses that creates numerous “steps” or numerous transfers necessary to occur for a sum of money to move from one institution to the next.
The Conflict Between Ripple and SWIFT
The SWIFT organization has been heavily criticized for its slow speed, often being quoted as taking anywhere from 3-5 business days at best for a transaction to occur. Typically that would be between two institutions in developed nations without too much time difference. That leaves out a lot of transactions that would then take > 5 business days.
In contrast, Ripple developed an all-in-one, near instantaneous international (or local) money transfer service with its product Ripple Net, which when fully realized utilizes the XRP cryptocurrency. Despite using a cryptocurrency, Ripple Net is a fully regulated service, with all Ripple Net transactions moving from one regulated endpoint to another.
The main battleground between Ripple and SWIFT is the competition for banks and institutions to use their services to transfer money. This competition has been ongoing for years now. Ripple only became a real competitor after the development of XRP and Ripple Net. However, there are a few things that need to be considered in this corporate war.
At Markshire Crypto I will give you the honest truth. I try to eliminate bias, but I do tend to favour cryptocurrency. That being said, we must acknowledge that SWIFT has made significant progress in the last 5 years to try to stay relevant in the 21st century.
SWIFT’s Messaging Service Improved: Increased Transparency, Instant Messaging
At the Paris Fintech Forum 2019 the CEOs of Ripple and SWIFT, Brad Garlinghouse and Gottfried Leibbrandt, respectively, were interviewed together (video below). We learned through the interview that SWIFT has upgraded its GPI (global payments innovation) with improved API (application programming interface) – tech jargon – the practical upgrades were: payment tracking/transparency and faster confirmation.
SWIFT claims that their payment speeds are now less than an hour when using their best technolgy. However, the average payment time remains at 1-3 business days. We must acknowledge this and give credit where credit is due. SWIFT also projects that their GPI will allow for real-time payments in the very near future (1-2 years). This is a huge improvement for SWIFT who traditionally had a 6% error rate and average transfer time of 3-5 business days. Albeit, only a small percentage of their customers are upgraded to their newest technology.
However, a key difference between Ripple and SWIFT remains. SWIFT is a one-way secure messaging platform that now allows tracking/transparency and now relatively quick transfer times. Ripple already allows for bilateral messaging and instantaneous settlement with XRP. SWIFT is only a messaging platform. SWIFT does NOT settle payments.
Ripple/XRP Makes Nostro-Vostro Funding Obsolete
With SWIFT, banks still depend on the massive funding of their Nostro-Vostro accounts internationally. This greatly reduces their liquidity, decreases their investable assets, and exposes them to currency risk. Since Ripple settles transactions with XRP, when a bank or institution sends money internationally, their currency is exchanged to XRP, which is then immediately exchanged to the destination’s currency, being routed through an already well developed global XRP liquidity network. This whole process is less than 2-3 seconds. This eliminates the need for Nostro-Vostro account funding, literally freeing up trillions of dollars in cash for banks and institutions.
There is over $20 Trillion USD locked up in Nostro-Vostro account funding, sitting idle. Imagine what the world could do with an extra $20 Trillion USD… XRP’s instant liquidity provision negates the need for significant Nostro-Vostro account funding. Since Ripple in conjunction with XRP is messaging and settlement, it makes Nostro-Vostro funding obsolete, freeing up capital for banks, institutions and governments.
Ripple Net/XRP is Orders of Magnitude Cheaper to use than SWIFT
Moreover, using the SWIFT messaging system itself is inexpensive, costing a few cents per message (but even so, it doesn’t cost anything to send a text or WhatsApp or Facebook message, so why should it cost money to send a SWIFT message?). Although, the banks completing the transactions still have service fees, which creates a situation where using SWIFT, in today’s terms is considered expensive, because of the bank intermediaries.
Using the SWIFT system is considered expensive only because using Ripple is magnitudes less expensive. Costing a fraction of a cent to send an XRP payment.
Ripple Net/XRP is an Open System, SWIFT is in a Closed Network
No matter how fast, cheap and easy to use SWIFT becomes, it is still a closed network. Ripple’s utilization of XRP operates on a global, open, transparent network that the Federal Reserve, Central Bank of England and JP Morgan Bank can transact anywhere in the world as easily as a tech-challenged baby-boomer can send their millennial child money at college.
This is the future of finance. Money will be sent as easily as a text or tweet. Moreover, the future of finance belongs online in an open network that anyone can challenge, improve, and critique. This may sound good, but it is important not to underestimate how significant this shift in network operations is. Human civilization is transitioning to a more connected and open culture as technology advances – moving toward Ripple/XRP, not SWIFT.
SWIFT is Testing R3/Corda
Ironically enough… Ripple is trying to take over global payments. SWIFT and the banks are currently the dominant global payment providers.
R3/Corda are companies that are linked to Ripple and who utilize the XRP cryptocurrency. R3 provides DLT (distributed ledger technology) and Corda utilizes that technology to settle payments in fiat or cryptocurrency, with the first crypto being used being XRP.
SWIFT has made a statement that they will be integrating the Corda technology in a test network for a proof-of-concept experiment. Not full integration, but the fact that SWIFT is testing technology that is tightly integrated with XRP is a very bullish sign for XRP and a poor sign for SWIFT.
Ripple/XRP Potential use in Other Asset Classes
SWIFT is a narrow use case. It is messaging only. Whereas Ripple’s XRP has multiple use cases.
The Codius white paper was released in 2014 and is an open source platform for smart contracts and decentralized applications (Dapps) similar to Ethereum. However, it is improved – it integrates with all coding languages, not limited like Ethereum is. It utilizes the XRP token for value transfer in this smart contract system.
When I think smart contract, I think of Ethereum and everything that is being developed on it. Namely, in the financial world, stocks are being tokenized on the Ethereum blockchain. I certainly can envision a future in the medium term where stocks (bonds and also perhaps real estate) will be tokenized on the Codius platform utilizing XRP.
While not directly related to Ripple or SWIFT or international payments, the salient point of this is that utilizing the XRP token will allow for easy integration and settlement across a multitude of platforms all with the open, transparent, global Interledger Network.
Ripple is the primary advocator for XRP, and as such, I feel that it is an important point to mention in this article since Codius will increase the value of XRP and thus further incentivize people to use it.
Summary of the Conflict between Ripple vs. SWIFT:
- SWIFT is a messaging platform with bank settlement.
- SWIFT has greatly improved their GPI (global payments innovation) with top transfer times down to less than an hour and has integrated transparency with transfer tracking numbers.
- But the average SWIFT transfer time remains at 1-3 business days.
- Ripple, utilizing XRP, is a bidirectional messaging and settlement solution for banks and institutions.
- Ripple settles transactions near instantaneously with negligible currency volatility risk.
- Ripple decreases the demand for international clearing houses.
- Ripple and XRP with smart contract technology (Codius) is scalable to include the tokenization of stocks, bonds, real estate and other financial/investment vehicles.
Markshire Crypto’s Conclusion
SWIFT has made improvements to their messaging system that allows tracking of payments, putting greater emphasis and responsibility on the banks to create a faster payment network. Whether or not this improvement is significant enough to not require Ripple’s technology is yet to be determined. Time will tell.
I do not envision a long term scenario with both SWIFT and Ripple. One will be better than the other and both profit and non-profit institutions/organizations and banks will prefer to have a lower cost, more transparent, open, adaptable system that integrates into many other areas in the financial industry (i.e. stocks, real estate, bonds etc).
Obviously, there will be an interim where Ripple and SWIFT are fighting over clients/users and will have a split market share. However, as time progresses it is my vision that Ripple will dominate SWIFT, much like how Netflix dominated Blockbuster and how Amazon dominated Walmart.
An alternate outcome is that SWIFT integrates XRP, and there is already discussion/news that SWIFT is partnering with R3/Corda. R3/Corda utilizes XRP.
In my opinion, Ripple will either take over SWIFT or absorb SWIFT. There is the smallest chance that SWIFT will win (<2%), but that would have to mean there is a fatal technical problem with XRP or Ripple the company would have to be proven to have been fraudulent or liars – all highly, highly unlikely scenarios.
Please comment and share your opinion/input. Also, enjoy the interview between Brad Garlinghouse and Gottfried Leibbrandt available to watch below.
Paris Fintech Forum – an Update on the War Between Ripple and SWIFT