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.”

SAP’s Kris Hansen on blockchain: ‘Put the trust into the algorithm’

In our coverage of bitcoin and supporting blockchain technologies, it’s clear that the hype way overshoots what’s actually happening on the ground. So, to better understand how companies are actually interacting with distributed ledger tech, we went to Kris Hansen.

Kris is a senior principal at SAP, focused on financial services at the global software player. In his role on the value engineering team, he works to identify ways that digital approaches can be used to find interesting opportunities to create disruptive business value. A self proclaimed “recovering” chief architect of a bank, he brings an interesting perspective on changing business models and technology platforms in financial services.

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Below are highlights, edited for clarity, from the episode.

The challenging transformation of today’s banks

I often refer to myself as a recovering chief architect from a bank. It can be a tricky job. You have all this technology complexity and legacy investment. And then you have the business showing up and saying it wants to do something completely different. You’ve got to somehow get this massive legacy shaped and formed in the right direction to go forward. Occasionally, you get an opportunity to transform and rethink the legacy. But that becomes a challenge in managing scope and finding a solution that’s really going to make a difference. You’re on the hook for feasibility (the stuff has to work) and the business outcomes (the business has to be happy with what they get). Being a bank architect is a tough job.

Preparation for the coming blockchain movement

Personally, I’m a tacit learner. For me to understand Bitcoin and Ethereum, I set up a node to see it and understand it. Businesses need to start getting hands-on. Understand what cryptocurrencies are and the differences in the platforms. From there, you have to start thinking about what it would take to connect the existing world to this new world. Quantifying that gap and determining what’s involved to change is where organizations should be at this point.

Industry cooperation around distributed ledgers

I’d really like to see us get to industry-wide collaboration. One of the great advantages of the consensus protocol is that we can establish trust where trust doesn’t need to be explicitly built between counterparties. We can put the trust into the algorithm. We can put the trust into cryptography.

I don’t see a lot of that happening with most of the enterprise adoption of these platforms. We aren’t there, yet. There tends to be more of a closed network. Some of it is the challenge of building the network and getting people to the table and agree on how to run these proof of concept projects. It’s hard enough to get multiple divisions in a bank to work together. Multiply that by 40 and you can see the challenge with some of the blockchain consortia. They have a lot of meetings. What we need to see is some of the bureaucracy-breaking concepts built into the platforms. Instead of having meetings, let’s lean on consensus technology to agree on how we’ll form this consortium. So far, the technology hasn’t helped align these groups.