The cross-border payments market continues to grow with increasing international commerce, migration, and changing economic trends. Currently, financial institutions like banks have significant dominance in cross-border payments with a market share of 95 percent. However, their payment transfers and services lack transparency, attract high fees, and lead to delays. These long-standing obstacles can be overcome with blockchain technologies like Ripple. Ripple provides cutting-edge mechanisms for customer-centric and innovative payment services. It aims to change the current payment landscape entirely by overcoming traditional pain points or even replacing the existing financial services system.
So, let’s take a look at how Ripple is giving tough competition to conventional competitors like Swift and Western Union in cross-border payments?
Legacy international payment systems are inefficient and complex. Their transactions involve multiple banks across different locations. In addition, there is a lack of transparency about fees and uncertainty on whether cross-border payments will even reach intended recipients.
Small to large businesses complain about different problems with cross-border transactions. Large, established corporations that deal in high-value international transactions have concerns about the lack of transparency in FX (Foreign Exchange) rates. For smaller companies, access to services and high-costs of cross-border payments are major issues.
Given these inefficiencies, traditional international payment systems fail to meet today’s global e-commerce demands for cross-border transactions. They need to provide improved transparency, more speed, and lower costs.
As a response, financial institutions are embracing new methods to expedite cross-border payment efficiency with transparency and reduced operational costs.
Within the current system, there are a few key players who dominate the international money transfer market around the globe.
SWIFT, a messaging system used by correspondent banks, enables financial institutions globally to disseminate information related to financial transactions. Its network consists of more than 11,000 banks. As of now, no other global payments network has been able to reach this number. Essentially, SWIFT doesn’t initiate money transfers but sends payment orders that correspondent banks must settle between themselves. The issue with the system is that it faces a lot of criticism for high fees, low speed, and opacity.
Western Union, a wire transfer system, is the most renowned name in the global remittances industry. The Western Union platform can execute only 32 transactions per second. To increase this number, the company has partnered with Ripple Labs. It is testing Ripple’s cross-border payment tech XRapid.
The reason that many financial institutions are adopting blockchain technology is its potential to resolve issues at the infrastructure level. Blockchain applications can provide fast, secure, and cost-effective cross-border transactions using distributed ledger technology. Such applications involve no intermediaries like correspondent banks and clearinghouses and ensure real-time transaction verification.
Ripple is an open-source, distributed ledger technology-based system for instant payments at minimal transaction costs. It makes use of a pathfinding algorithm method to obtain sets of currency swaps that provide the lowest feasible fees for cross-currency payments.
Ripple’s cross-border payments product designed for banks is known as xCurrent. It doesn’t require Ripple’s native token XRP, which makes it possible to process cross-border transactions within seconds at low operational costs. Ripple combines payment messaging with funds settlement. It is a feature that was previously missing for cross-border transactions. Customers who use Ripple can also keep their money in banks or other financial institutions. Its network is continuously growing as more than 200 banks and financial institutions have signed up to use xCurrent. They include major international payment providers that operate in multiple countries, like Banco Santander, American Express, USB, and many more.
Ripple also aims to solve the liquidity problem with the upgraded version of xCurrent system called xRapid. It uses Ripple’s digital asset XRP to replace all Nostro/Vostro accounts. With XRP, banks don’t require to have multiple accounts in different fiat currencies. Besides, XRP transactions take a few seconds and need minimal human interaction.
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Blockchain technology can improve the overall efficiency of cross-border payments. However, its potential remains largely unexplored and requires seasoned application support for large-scale payment infrastructures. Banks can benefit by availing the expertise of blockchain technology providers like Ripple to improve cross-border payments, reduce fraud and settlement time, and speed up transactions.