Big in Japan: How blockchain startup Ripple plans to disrupt Swift

Blockchain startup Ripple has now cornered a third of Japanese banks and is set to reach half of them later this year, but the first mover among providers of distributed ledger technology has been much quieter in the U.S.

Ripple has been so successful with its payment projects that this year it’s pushing to shift focus to its network. The company was a first mover in the blockchain space and has been relatively quiet and productive compared to its “vendor” peers like Hyperledger or R3 CEV. More recently, however, it has been anything but shy about going head-to-head with Swift, the current hub at the center of the global banking – which makes it hard to ignore how few U.S. bank partners Ripple has.

“[Ripple] is looking to bring some of the big boys to the network but as you can imagine, those are some of the biggest beneficiaries of the inefficiencies of correspondent banking,” said Javier Paz, a senior analyst at research firm Aite Groupe.

Ripple’s Patrick Griffin, senior vice president of business development, said the company has developed the first blockchain network with rules and commercial standard legal agreements. Its biggest obstacle now is in growing its sales team quickly enough that it can keep up with its innovation team, Griffin said. The company now has 150 employees.

Although it’s clear cross-border payments is due for an overhaul, it’s not so clear that Swift is. Banks and fintech companies embrace collaboration and partnership and the idea that the latter will come eat financial incumbents’ lunch is now a thing of the past. Most of those banks belong to both the Hyperledger project, of which Swift is a board member, and the Swift network itself.

In cross-border transactions, there are generally multiple stops a payment makes before it goes from the payer to the receiver. If, for example, someone in India wanted to send $1,500 to someone in the U.S., that person would probably visit a local bank perhaps unable to make that transfer, so that bank would send the payment to another Indian bank that could. The payment then goes to a U.S. bank which sends it to the recipient’s local bank, where the customer would finally pick it up. Each stop along that payment’s way eats up time and money in exchange and holding fees.

Swift’s biggest problem is that of “nostro accounts,” basically correspondent bank accounts – and that’s where Ripple can provide real value to the system, said Tim Coates, managing consultant at Synechron. Swift announced it is running a blockchain proof of concept with Hyperledger technology this January – months and in some cases a year after most of its U.S. members began running their blockchain PoCs. Damien Vanderveken, head of R&D at SWIFTLab, said it’s looking to see if blockchain technology can minimize or eliminate the friction brought by nostro accounts, but did not comment further on the project.

“The nostro problem is a big part of Ripple’s value proposition,” Coates said. “If we can do realtime settlements then we don’t need a whole store of nostro accounts. If not, then we always need a buffer of funds in each account and that buffer is just locked away. We shouldn’t have to put a lot of money away so we can exchange money between banks.”

Swift effectively is looking for ways to allow banks to use existing pipelines of connectivity, like Swift’s messenger, that don’t necessarily rely on nostro accounts but use other types of messaging, said Javier Paz, a senior analyst at research firm Aite Group. Effectively, Swift would be willing to disrupt itself to keep away competition like Ripple.

“Ripple’s success has been in cross-border currencies first in the peer-to-peer space and simple remittance and transfer across the globe,” said Ramesh Siromani, a partner in the financial institutions practice of A.T. Kearney, a global strategy and management consulting firm. “But to gain more volume attraction and network growth would require signing up more banks across the globe and in business-to-business payments where volumes are bigger.”

Keeping pace with technology: How Payoneer is setting up payment infrastructures for SMBs

The digital age has knocked down borders and allowed companies to go global, but these same companies still lack affordable cross-border payment solutions.

“We see technology as leveling the playing field, allowing remote businesses to get involved in the global economy,” said Scott Galit, CEO of Payoneer. “Tools and infrastructures that used to be open to only large enterprises are being opened up for SMBs. Payment infrastructures were created for bigger banks and financial institutions, but they suck at working with small businesses.”

Galit has some experience in digitizing new markets as a member of the investment banking team that took eBay public. The idea of creating a global digital garage sale was a game changing idea, but, at the time, there wasn’t a good payment method to facilitate transactions. He recalls how big of a mess it was: In the beginning, the eBay founders used to receive checks in the mail from buyers with a request to forward the money to the sellers. The need for a payment infrastructure led to the acquisition of PayPal, and the rest is history.

Galit believes that B2B marketplaces are in the same situation as eBay was in before its PayPal acquisition.

“Broadly speaking, the pace of tech for businesses finding each other is changing faster than the payments infrastructure,” he said. “Marketplaces all over the world, from used medical equipment to pallets of electronics, don’t have payment capabilities. We’re trying to build an infrastructure to make those markets transactional.”

Payoneer’s technology enables SMBs to accept and send payments. Using banking APIs, Payoneer is able to directly connect companies in two different countries and facilitate payments between the two.

The New York-based company claims 3 million users and has raised hundreds of millions of dollars in venture backing since its inception in 2005.

Payoneer’s cross border mass payout service allows SMBs to pay suppliers in 200 countries in over 150 currencies. The platform also enables marketplaces, like Amazon, Airbnb, and Getty Images, to make automatic distributions to the vendors who sell on them.

Payments are moving faster every day. Payoneer has the ability to do free instant payments if both parties are registered on its platform. But technology can only speed things up so much. To Galit, the breakthrough isn’t creating a faster method of payments or forcing everyone to move onto distributed ledgers and blockchains. It’s about regulation.

“There is a systematic overestimation of the value of technology in financial services. The last mile of digital payments is regulation. Banks don’t get fined because of technology — they get fined because of compliance,” he concluded.

[podcast] Why a 164 year old payments giant partnered with the hottest social media tool on the planet

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One of the themes we’re tracking here at Tradestreaming is the confluence of incumbent financial institutions with new technologies, platforms, and tools. When you look at some of the largest and oldest financial institutions, some are indeed embracing the future.

Western Union is one of those firms. You’re probably familiar with the fact that Western Union provides consumers and businesses with a variety of ways to send and receive money around the world. Through multiple brands , the company, which is 164 years old, has built a combined network of over 500,000 agent locations in 200 countries and territories and over 100,000 ATMs and kiosks, giving it the capability to send money to hundreds of millions of accounts. In 2014, The Western Union Company completed 255 million consumer-to-consumer transactions worldwide, moving $85 billion of principal between consumers, and 484 million business payments.

David Thompson, CIO of Western Union
David Thompson, CIO of Western Union

The scale is pretty staggering and what’s interesting is how the firm is embracing some of the same tools its customers are using. A recent study by McKinsey estimated that by 2020, 12% of global remittances will be initiated via social media and communications platforms. To this end, earlier in the fall, Western Union launched the WUConnect service, which opens Western Union’s internal transaction processing network to platforms that want to offer social and text payment capabilities to their own customers.

The company created application programming interfaces and a software developer’s kit to let social networks, like Facebook, access the service. And just a couple of weeks ago, the company announced that WeChat, the Chinese communications platform, is rolling out an integration that would enable its 650M active users to send money to one another over the WU Connect service.

David Thompson, Western Union’s Chief Information Officer, joins us today on the Tradestreaming Podcast to discuss how his firm views the convergence of social, technology, and finance and how he’s helped manage the internal processes to ensure Western Union stays competitive and relevant throughout the evolution of today’s technology.

Listen to the FULL episode

What you’ll hear in this week’s podcast:

  • The inherent socialness of payments and why it makes sense for apps/social platforms to offer peer to peer payments
  • WUConnect, Western Union’s API / SDK suite to integrate cross-border payments into social media networks
  • What’s driving the partnership with WeChat, China’s leading social media communications platform with 650M monthly users
  • How payments can drive additional stickiness to large social platforms
  • Strategy drill-down on Western Union’s global leadership in cross-border and digital payments
  • How Western Union’s competitiveness is driven by a large investment in regulatory compliance in 200 countries around the world
  • David’s view on the challenges in cross-border, cross-currency money transfer and what he and Western Union have done to solve for these
  • Why McKinsey believes that by 2020, 12% of global remittances will be initiated via social media and messaging platforms
  • What David has planned for new types of partnerships in 2016 as well as new functionality slated to be launched as part of WUConnect

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