Ripple: Disrupting Cross-border Transactions with Blockchain Technology
Ripple: Disrupting Cross-border Transactions with Blockchain Technology
Two weeks ago, I woke up to yet another infuriating declarations by the Central Bank of Nigeria – effective immediately, local-denominated cards or accounts would no longer be authorized for transactions outside the country . Basically, I could no longer access my naira-denominated funds via a U.S.-based ATM or use my cards for online transactions. Cue the scramble to exchange my local denominated-funds into USD…
The Nigerian economy has been one of the hardest hit by the decline in Oil prices over the past 24 months. According to the Wall Street Journal, As a consequence of the slide in price, “Nigeria entered its first technical recession since 2004 in the second quarter, marking a symbolic end to more than a decade of robust growth that turned the West African nation into the continent’s largest economy.  ” The government and its financial institutions, have taken to drastic measures to alleviate the resulting foreign-exchange pressures as the country sees a lot less USD inflow from oil revenues, far outsripped by the outflow (in USD) from the country. Bottom-line, accessing foreign currency and settling cross-border transactions, has become a nightmare.
Assume Average Joe, who operates a personal checking naira-denominated bank account with Bank Nigeria, travels to Boston with his naira-denominated Visa card. Any transactions in Boston e.g. cash withdrawals of USD from a Bank of America ATM in Boston, are deducted from his naira account back in Nigeria, at the prevailing exchange rate set by Bank Nigeria. Consequently, Bank Nigeria has to settle Bank of America for the USD withdrawn by Average Joe.
To do this, Bank Nigeria would likely operate a USD account in the US, from which the payout to Bank of America will be executed. Most large commercial banks worldwide hold these bank accounts, called Nostro accounts, in every country with a convertible currency. Major examples of convertible currencies are the U.S. dollar, Canadian dollar, British pound, the European euro and the Japanese yen . Bank Nigeria also has to ensure its pre-funded Nostro account has sufficient USD to cover any necessary settlements. These settlements typically take days via the current SWIFT network, and also lead to increased transaction cost for consumers and banks.The global cross-border payments industry generates $22.5 trillion in annual volume, but is plagued by $1.6 trillion in costs, based on the Federal Reserve’s average global cost of international transfers .
Enter Ripple, a blockchain-based technology which “offers a real-time cross currency settlement solution and a FX market making solution, enabling financial institutions and multinational corporations settle cross-currency payments efficiently, by connecting banks directly to other banks around the globe for direct bank-to-bank settlement.”
In Ripple, a public ledger of accounts, balances, and IOUs are kept updated by everyone simultaneously in the Ripple network, which is a distributed collection of servers around the world.. Each bank, or agent, within the Ripple network would essentially hold a copy of the same encrypted ledger, allowing the paying bank to instantaneously transmit a record of its cross-border transaction or settlement and have its “account” on the Ripple network get debited or credited instantaneously, before the actual funds are finally settled. The receiving bank will essentially receive this information in near real-time, a much faster and fail-safe settlement process than the current multiple-days spent transmitting and verifying settlements between international banks via the SWIFT protocol.
Ripple also ensures a much lower total cost of settlement for banks and their customers by eliminating processing fees, reducing operational and risk-based costs, and most significantly, reducing the opportunity cost of prefunding accounts.
Ripple has made significant headways in convincing a number of global financial institutions to use its networks, some of which include Bank of America Merrill Lynch, Standard Chartered, UBS, Santander, amongst others. Multinational corporations, such as Deloitte are also beginning to transact and settle cross-border payments via Ripple’s block-chain technology. In Deloitte’s instance, the firm’s objective for integrating into the Ripple network was to cross-border payments, either in local or foreign currency, in real time without relying on intermediary banking relationships .
Perhaps, Ripple’s gradual acceptance by the major financial institutions will present more viable path for helping financial institutions in countries facing currency pressures, deal with cross-border settlements more efficiently.
 Restriction On Naira Cards Abroad Will Remain – CBN, https://www.naij.com/679768-restriction-banks-stop-use-naira-cards-abroad-will-remain-cbn.html
 “Oil-Price Drop Pushes Nigeria Into First Recession Since 2004”
 “New Ripple Settlement and FX Solutions Lower the Total Cost of Settlement for Banks and Their Customers” https://ripple.com/ripple_press/new-ripple-settlement-and-fx-solutions-lower-the-total-cost-of-settlement-for-banks-and-their-customers/
“Cross-Border Payments Nirvana: Are We There Yet?” https://payments.nacha.org/sites/payments.nacha.org/files/files/ST08%20-%20Cross%20Border%20Payments%20Nirvana%20Are%20We%20There%20Yet.pdf
 “Ripple Explained: Medieval Banking with a Digital Twist” http://www.coindesk.com/ripple-medieval-banking-digital-twist/
 “Ripple and Temenos power Deloitte’s payments project” http://www.bankingtech.com/497492/ripple-and-temenos-power-deloittes-payments-project/
Student comments on Ripple: Disrupting Cross-border Transactions with Blockchain Technology
To me, the most interesting part of Ripple’s business model is its use of XRP as a bridging currency. Ripple is correct in saying that use of XRP facilitates payments in cases where there is no chain of contact between two paying agents on either sides of a transaction. It’s also true that settling transactions in a third currency eliminates counterparty credit risk for the paying agents. My question is whether or not use of XRP fails to eliminate counterparty credit risk, but instead transfers it to Ripple? If so, it seems to me that setting the XRP exchange rates and settling XRP trades could add extra risk into Ripple’s business model, and by extension to its network of global institutions.
Awesome post Ozi! Really appreciate simplifying the concepts and process here. Questions that come to mind 1) how easily adoptable is this technology for consumers? 2) what are the main challenges from a government and regulations perspective? 3) are there other adjacent or like markets that would this apply to?
This is a great explanation of the Ripple business model ! I’ve always wondered how their technology is different from / dependent on the technology that bitcoin uses, and whether it is susceptible to the same risks of Bitcoin ? While the company seems more akin to a Paypal or Transferwise, the decentralized technology and open-sourced protocols make it akin to Bitcoin. This article seems to suggest that it has gained better traction with incumbents compared to Bitcoin: http://www.coindesk.com/ripple-big-bank-blockchains/