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XRP: Disrupting SWIFT gpi and Correspondent Banking

Panosmek

Panosmek

I study Finance & Accounting and i am a big Ripple and XRP enthusiast!

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Globalization is increasing but we still haven't an actual international payment network for international transfers. We can send messages, emails and move information in seconds but we still can't move value and money fast, cheap and securely enough. And actually no money is ever moved with the current system, just account entries in correspondent bank’s records gets adjusted. We have SWIFT which is actually owned by the biggest banks and it is a messaging service. In order to make an international transfer and get settled, your bank must either have already established a direct relationship with the receiving bank which means that it must have parked money there (having a pre-funded (nostro) account) or your bank can rely to other intermediary/correspondent banks (usually the major banks) that have already established a relationship with the receiving bank and your bank pays them (fees) for that and that's what most of the banks do because it takes many months (usually 9+ months) for a bank to create a new relationship with another bank (while on RippleNet it just takes 2 weeks). This is called correspondent banking. Isn't that costly and time consuming? You will ask. Of course it is. You can see how international payments work with the current system in the pic below:
79710a78-c96d-45b1-94eb-219b20965daf-1-

Why try to improve a horse and cart when you can get a Ferrari

said Brad Garlinghouse on 30th January at Paris Fintech Forum. He is right, isn't he?

SWIFT has created a new improved system called SWIFT gpi which, as they claim, it improves the speed, security and transparency of payments. They say that about 50% of SWIFT gpi payments are credited to end beneficiaries within 30 minutes. That's right, credited, which means that the actual settlement of funds is still done much later. It often takes 3-5 days on average so it can't keep up with the payment and this results to trapping liquidity. But what SWIFT also hasn't told you is that those payments that are credited between 30 minutes and hours are mostly on the same time zone and in popular corridors and also only about 300 banks use SWIFT gpi right now from the total 10,000+ and it will take a long time, probably a few years, for all the banks to join. If they join. So they did the obvious to increase the usage and adoption of gpi, they partnered with R3 but let's leave that for later. If you want to send money to another continent or better to an exotic corridor then it may take up to 10 days and don't forget the huge fees and most importantly the error rate that still exists even with SWIFT gpi and which can reach up to 12.7% (6% on average). Imagine if 6-12 out of the 100 messages or emails that you sent, failed to reach its destination and you didn't even get a notification for this. Conclusion? The current banking system is still very inconvenient, slow, expensive, non transparent and insecure and as Ripple’s Director of joint venture partnership, Emi Yoshikawa said about SWIFT gpi:

It is just a marginal improvement based on an outdated architecture

Ripple's Global Head of Strategic Accounts, Marcus Treacher has also pointed out:

SWIFT doesn’t really compete [with Ripple] in our view. SWIFT gpi has been around for a long time and it is making the SWIFT process a little less painful by adding more messaging and control into a 20th-century model. We are thinking about how money moves in a very different way. We are creating an internet of value. It will work like the internet does. You will be able to download money as data on your mobile phone. It is very fast and accurate, and we are creating a model where money will move inexpensively, safely and securely. SWIFT gpi will improve things a little bit but it won’t really match the speed, efficiency and visibility that we create with the Ripple network, so we don’t look at them as a serious long-term competitor.

Don't forget that the head of gpi has said that the goal for SWIFT isn’t to settle in real time, but rather to create certainty for businesses. A certainty with an error rate that shouldn't even exist in payments, with a vulnerable system that is prone to hacking and a system that mostly benefits the banks that are in the top of the pyramid of SWIFT, which banks profit against all the others (smaller banks and customers). As Brad Garlinghouse has said pointing to Citi, HSBC and Chase at the top of SWIFT:

They are making a lot of money from other banks. We talk to banks, and 99.9% of them want Ripple to be successful because they’re sick of paying these guys.

Global banks like Citi make an automatic $8 billion on cross-border payments. I think Citi will be the last customer we ever sign up because it has the highest vested interest in not changing the status quo.

So now you understand why SWIFT doesn't want to change its system and create a new one adopting blockchain and digital assets having also stated that the company decided to build the gpi service without blockchain because it wanted to deliver immediate value to its clients and stated on twitter that cryptocurrencies will not solve delays in international payments. Ironic isn't it? While it has been proved that blockchain technology and digital assets solve all these problems, SWIFT claims the opposite. Too much profit is at stake, why should they change this profitable system?

Fortunately, there is Ripple that wants to change and disrupt all these. Ripple is building a payment network only because the existing ones aren't good enough to support their needs, as it is mentioned by David Schwartz who has also said that rapid payments create rapid settlement and with the current system rapid settlement is not possible, that's why XRP exists as it is a rapid settlement tool. xCurrent had to be created because the current payment technology isn't good enough to get the benefits of XRP. xCurrent compares with SWIFT gpi as they are both messaging systems and while xCurrent solves all the problems of SWIFT, eliminating inefficiency in current payment system with no error rates, payments-settlement in seconds etc. but it doesn't solve the pre-funded settlement problem.

XRP as a bridge currency can eliminate the need of nostro-vostro accounts as well as the need of the many correspondent and intermediary banks and release the large funds that cost too much and are trapped worldwide which are estimated to be about $27 Trillion. This means that these trillions of dollars are trapped in multiple currencies and their only use is to be used for international payments while they could be used to do other more productive things that could benefit the economies and especially the small ones that face many problems. With this way, banks only have to hold their domestic currency and maintain one account with XRP which minimizes the number of intermediaries involved and their markup on spreads. Ripple’s xRapid solution uniquely uses XRP to offer on-demand liquidity. Taken together, Ripple and XRP minimize settlement risk and eliminate the need for banks to collateralize nostro accounts around the world, resulting in a lower total cost of settlement.

SWIFT announced few days ago the integration of SWIFT gpi to R3's Corda Settler. This means that SWIFT directly competes with XRP as a settlement mechanism. The companies/institutions that use Corda Settler can choose either to settle with XRP or with SWIFT gpi (the old way that was mentioned earlier). With this decision, SWIFT faces Ripple directly and sees them as a big threat and the biggest competitor and that's why they decided to compete directly.

This is how Corda Settler looks right now (i found the pic on twitter, big thanks to the creator):
50863029_627129387718529_4523165900643237888_n-1-

Many people asked me how Corda Settler really works and what the SWIFT gpi integration really means, especially for XRP... and my answer on these is:

What Corda Settler does in a few words is that it settles payments via any supporting settlement mechanism and this can either be a digital asset (like XRP which is the first one to be integrated in it) or any traditional asset (in this side it's now SWIFT gpi which settles in fiat currencies). SWIFT said:

The SWIFT and R3 Corda Settler trial will enable corporates to make a payment authorization via a GPI link to their bank through the Corda Settler platform. GPI payments will be settled via the large and growing SWIFT GPI network, and the resulting credit confirmations will be reported back to the trade platforms via GPI Link on completion.

What SWIFT's CMO also said is that while DLT-enabled trade is taking off, there is a pressing need for fast and safe settlement in fiat currencies and the appetite for settlement in cryptocurrencies is still small.

In the beginning, many people believed that SWIFT was going to use XRP and finally decided to make the change but... it actually means exactly the opposite. SWIFT's arrogance is in the highest level than ever before. Anyway, who would want to abandon such a profitable system, reduce and share the profits with all the other smaller banks just to make cross-border payments efficient? Certainly not SWIFT and their top banks.

If you watched the panel discussion between Brad Garlinghouse, Ripple's CEO, and Gottfried Leibbrandt, SWIFT's CEO, you can understand that from the way Gottfried talks is a little bit confusing and he somehow seems nervous, showing ignorance and making false statements about the use of cryptocurrencies in payments and their volatility, the AML, compliance etc without any coherent arguments to support what he is saying, why SWIFT is better and many more. It's interesting if you consider that Gottfried is a fan of blockchain and digital assets and has praised Ripple and XRP back in 2013 about reinventing the correspondent banking but representing SWIFT he said things that even himself didn't believe. It makes sense if you think about it, he is there representing SWIFT and not himself so he must say things that favor SWIFT. Don't forget that he is stepping down from SWIFT in June.

Now let's continue with the Corda Settler.
Be careful, Corda Settler neither uses nor has integrated xRapid but only XRP Ledger. Let's take for example a Company B has an obligation to pay $100 to Company A and the Company A decides to receive XRP for this obligation (settlement through Corda Settler). For this to happen, both companies must already use XRP and have an XRP address or/and an XRP node as the video of R3 explains. What will happen in simple words and in 3 steps is:

  1. Company A wants to receive XRP for this obligations so it updates in Corda Settler the XRP that they must receive with the current exchange rate. Let's say that the current price of XRP is $0.30 so company A must receive 333.3 XRP.
  2. Company B buys 333.3 XRP and sends them to Company's A XRP address.
  3. The payment is now settled and cleared.

Concluding about Corda Settler, the difference between xRapid and Corda Settler is that xRapid starts with FIAT 1 (for example USD) then buys XRP and finally sells them for FIAT 2 (for example MXN), while Corda Settler allows payments to be settled in any asset and it starts with FIAT and ends with the asset without being sold.

It is a great concept and it will increase the utility and usage of XRP for sure in the future as SBI CEO, Yoshitaka Kitao, has mentioned that wants to increase XRP adoption in Corda Settler. But for now, there will not be much usage of XRP in Corda Settler and it will not be a popular choice of settlement, as both counterparties must be using XRP, compared to SWIFT gpi which has the top hand now as it has the most institutions, so it needs time, patience, greater adoption and of course regulatory clarity. The benefit here is that once all these happen and institutions start using XRP once they realise the many advantages that it has over SWIFT gpi, then the game is over. Ripple will also help with that by adding more and more institutions to RippleNet.

Conclusion: SWIFT says that gpi is the new standard in cross-border payments. Well, after looking straight at the facts it seems that not only it is not the standard but it is far away from being that and unless they create a whole new and open network and system (which seems impossible), it will never be. The certain thing is that the banks that are in the top of SWIFT, are afraid of Ripple and they are doing everything to stop them or slow them down. SWIFT has run out of options as SBI CEO said.

Only time will tell who is the winner. What we can do is continue contributing and spreading facts.
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Sources:

  1. https://www.natcnc.com/msb/correspondent-banking-crisis/
  2. https://www.investopedia.com/ask/answers/071715/what-role-does-correspondent-bank-play-international-transaction.asp
  3. https://www.theglobaltreasurer.com/2018/03/26/is-ripple-a-threat-to-swift-gpis-monopoly-on-cross-border-payments/?fbclid=IwAR1qKJ4rIDDeWBjkrjgJkbft4xOetKsAlbAIjkT2o0_Z-HSyC5SGousRTco
  4. http://blog.oanda.com/solutions-for-business/blog/a-future-without-swift-with-blockchain
  5. https://www.finextra.com/blogposting/16147/swift-gpi-vs-ripple-payments
  6. https://www.gtreview.com/news/fintech/ripple-dismisses-marginal-improvement-of-swift-gpi/?fbclid=IwAR0o3qlKMViOMSMkfgFz04XM2qohh2VP_7M98-0uKymBQUk-MER_LzDyMUE
    7.https://www.reddit.com/r/Ripple/comments/76kq8v/swift_has_successfully_tested_distributed_ledger/doeyrn3/
  7. https://twitter.com/cryptopolis_xrp/status/1090456450034532352
  8. https://ripple.com/insights/empire-strikes-back/
  9. https://ripple.com/files/xrp_cost_model_paper.pdf
  10. https://medium.com/@siddharth.sitpure/a-closer-look-at-ripples-blockchain-technology-and-xrp-9e036e1bf019
  11. https://ripple.com/insights/ripple-and-xrp-can-cut-banks-global-settlement-costs-up-to-60-percent/
  12. https://www.cnbc.com/2019/01/07/ripple-wants-a-piece-of-the-global-payment-system.html
  13. https://www.ccn.com/ripple-ceo-brad-garlinghouse-talks-xrp-long-bitcoin/
  14. https://twitter.com/swiftcommunity/status/1054169510490464256
  15. http://blockchain.unsw.edu.au/symposium18/HTML/slides/rao.pdf
  16. https://www.swift.com/news-events/news/swift-to-bring-benefits-of-gpi-to-dlt-and-trade-ecosystems
  17. https://www.r3.com/news/r3-launches-universal-corda-settler-application/
  18. https://www.investinblockchain.com/swift-integrates-r3-corda-settler-dlt-trial/
  19. https://twitter.com/Dillon/status/1091029125454852096

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Panosmek

Panosmek

I study Finance & Accounting and i am a big Ripple and XRP enthusiast!

Read More