The Race to Instant Global Payments
SWIFT’s GPI vs Ripple vs R3
Already, most funds are digitally represented with numbers in some electronic ledger. Then why do some payments take days or more to clear? In today’s fast-moving online world, these delays are unacceptable and consumers and businesses are looking for payment systems that can keep up.
With all the technological capabilities that are available today, there are numerous solutions to consider. However, it’s not simply a matter of flicking a switch. The international banking system has thousands of players, in multiple jurisdictions, with billions of dollars and untold man-hours invested in legacy systems, making wide-spread and critical changes an enormous task.
With the high stakes — over 30 trillion dollars in global payments annually —and the huge potential of new payment systems, the next few years will see a shakeout of different players on our way to comprehensive, instant global payment systems.
SWIFT’s Global Payments Innovation (GPI)
The central player to the current international funds transfers is SWIFT (Society for Worldwide Interbank Financial Telecommunication), a system that went live forty years ago. There are 11,000+ financial institutions (FIs) connected to SWIFT, in over 200 countries, so the infrastructure is widespread, reliable and secure.
While SWIFT continually improves its processes, its fundamental technology stack is from a totally different era; there were no ‘stacks’ back in the 70’s. With new fintech offerings promising to deliver faster and cheaper cross-border payments, SWIFT is introducing GPI, which will “dramatically improve the customer experience in cross-border payments by increasing the speed, transparency and end-to-end tracking of cross-border payments.”
The first phase of the new standard already has cross-border payments flowing through thanks to participation from over 90 FIs. It offers same-day transfer of funds, transparent fees and end-to-end payments tracking.
SWIFT refers to phase two of GPI as the digital transformation of cross-border payments. It will enable three new services:
- Stop and Recall Payment service
Stop payments immediately, no matter where they are in the process
- Rich Payment Data Transfer service
Additional data layer, to improve compliance checks and reconcile a payment with multiple invoices
- International Payment Assistant service
Additional payment information on entire processing chain before sending payment to generate error-free instructions
The third phase of GPI is currently in investigation, as a proof-of-concept. It is looking into blockchain technology, or DLT (distributed ledger technology). As the US Federal Reserve Board notes in a paper, Distributed ledger technology in payments, clearing, and settlement, “the technology could reduce or even eliminate operational and financial inefficiencies, or other frictions, that exist for current methods of storing, recording, and transferring digital assets throughout financial markets.”
With SWIFT’s existing position and interest in maintaining the status quo, it’s little wonder that they are not enthralled with DLT yet. While they are dipping their toes into the area, SWIFT states, “DLTs are currently not mature enough for broad use on cross-border payments, this technology may provide solutions for the associated account reconciliation.”
While the incumbent is wary of DLT, there are others that are betting heavy on this new model. One company making substantial progress is Ripple, who have raised nearly $100 million in funding and have partnerships with over 75 FIs.
From the Ripple website: “Ripple’s distributed financial technology enables banks to send real-time international payments across networks. Using Ripple, banks can meet growing demands for faster, low-cost, on-demand global payment services for any payment size. The result: new revenue opportunities, lower processing costs, and better overall customer experiences.”
Ripple uses an open, neutral protocol (Interledger Protocol or ILP) to power payments across different ledgers and networks globally. It also allows settlements using its native XRP cryptocurrency to act as a bridge currency between different foreign currencies.
One major point that Ripple is pushing is the savings in back-office costs for processing and settling international payments. A typical savings is in the range of 60% less per transaction, but it depends on transaction volume and amount. A savings like that offers an incentive for FIs to switch to Ripple and with its list of reputable partners, rise in the value of XRP (up over 1000% in the last 30 days, 4/17/17 to 5/17/17) and innovative technology, it’s one to watch.
Another DLT company, R3, has a consortium of 80 FIs working together to design and deliver advanced distributed ledger technologies to the global financial markets. They have created Corda, a platform to record, manage and synchronize financial agreements between regulated financial institutions.
While Corda does include elements of blockchain, it was purposefully built to bypass other elements. Like DLT, workflows are controlled without a central controller. However, there is no unnecessary global sharing of data, only the affected parties can see their legitimate data.
In regards to smart contracts, Corda provides a direct connection to human-language legal prose documents. Smart contracts, computer programs that execute depending on the terms of the agreement, are one of the main selling points of blockchain. By tying smart contracts to legal language, Corda anticipates resolving problems by normal legal measures.
Another differentiator is on the issue of consensus. Blockchain systems work by having consensus amongst all the computers on the system. For Corda, consensus occurs between parties of the deal, not the whole system.
While R3 does has a large number of FIs in its consortium, it has been having issues with the financial terms for raising funds. JPMorgan recently left the group (April 2017) and Goldman Sachs, Banco Santander, Morgan Stanley and National Australian Bank left in late 2016. On May 23, 2017 R3 raised $107 million from over 40 institutions.
Will Ripple or R3 gain traction? Will blockchain be the way forward to a new, global payments model? As the US Federal Reserve Board notes, “Given the technology’s early stage, a number of challenges to development and adoption remain, including in how issues around business cases, technological hurdles, legal considerations, and risk management considerations are addressed.”
Could some other company or technology enter the race and take significant market share? While we highlight three in this post, there are numerous players that can quickly get up to speed. There are other payment companies that have substantial connections and technology already in place and can pivot in. There are technology consortiums, such as Hyperledger and Digital Assets Holdings that are dealing with similar bank customers and technologies and can adapt their offerings to meet the global payment requirements. With new fintech innovations happening almost daily, perhaps an unknown player will come up with some brand new solution. If you think a certain player or technology will win this race, let us know your ideas in the comments.
Whether a particular company or technology succeeds or not, the race to instant global payments is on . The technologies and the players might change, but the inevitableness of the outcome is clear. The path to more transparency, lower costs and better transaction management enables a stronger world economy, more interconnection and more trust.