Ripple V Swift

Ripple vs SWIFT:
Payment (r)evolution
Summary
Cross border payments are currently slow, expensive and opaque.
Ripple offers sub second efficiently priced payments using a variant
of blockchain technology. In response, SWIFT has launched GPII,
same day credit of funds, up front pricing and payment tracking.
This article explores the two solutions, and what they mean for
treasurers.
Status quo
Currently, cross border payments go through the 600 year old
correspondent banking system (much constrained by regulators
clamping down on KYC and AML), facilitated by SWIFT messages
like MT101 and ISO20022 pain (payment instruction).
This requires getting 6 players linked up payer, payers bank,

payers banks correspondent, beneficiary banks correspondent,
beneficiary bank, beneficiary.
Ripple vs GPII David Blair 2016 david.blair@acarate.com Page 1

Since the messages (generally) flow sequentially, and not all banks
do STP (Straight Through Processing), this takes a while. Worse,
over time banks have got into the habit of sitting on our money for
arbitrary lengths of time (called float which is a euphemism for
regulator sanctioned theft). Even worse, the banks along the chain
also help themselves to arbitrary and often material deductions,
with confusing names like lifting fees and in lieu fees. So when the
money finally arrives, we just have to be grateful some of it got
through the system at better than walking speed.
(I exaggerate a little. I do see cross border payments going through

current channels with only one (or two) fee deductions and within
24 hours. But that feels lucky. All elements of my exaggeration
remain regrettably common practice.)
In these times of Venmo and PayPal and instant everything, this

feels antediluvian. How is it that Amazon can delivery physical
goods faster than banks can deliver a credit entry, which is basically
a secure email only bits and bytes?
In fintech parlance, this looks like a market ripe for disruption.
Ripple
Ripple is disrupting this model with sub second cross border
payments with automated best pricing from its network. Since
Ripple payments are nearly instant, their model removes credit and
liquidity risk from the process, thus lowering bank (and societal)
costs considerably. Since the network finds the best price for
exchange (converting from one currency to another) and liquidity
(delivering the beneficiary currency), pricing is optimised and
customers are no longer locked in to the wide spreads currently
reflected in bank board rates.
The benefits for corporates (and other customers) is clear in terms

of price and speed. Corporates will also appreciate the elimination
of settlement risk. Further, Ripple uses industry standard ISO and

MT messaging, and because participants are directly and
multilaterally connected there is no loss of corporate data in the
payment messages. Known fees and complete messages make for
much higher auto reconciliation rates.
Unlike some other fintechs, Ripple is bank centric. Banks connect to

the Ripple network not their customers. This has two big benefits.
First, customers are used to trusting banks (which is better than
having to get comfortable with entrusting your money to some
fintech you never heard of). Second, regulators are comfortable
with banks (which means they will not pull the plug on Ripple as
they might with non bank fintechs).
Ripple technology
Although Ripple is also a blockchain company, and has its own
currency code XRP, the cross border payments are using a subset
of blockchain technology. Ripple uses the consensual validation of
encrypted hashes to secure the messages across the Ripple
network, but does not hold the ledger. Ripple calls this ILP (Inter
Ledger Protocol) and they have open sourced it to public domain.
ILP allows Ripple to connect existing bank ledgers (ie their

traditional databases). This lowers barriers to entry. In effect, banks

connect their core systems to the Ripple network analogous to
how they currently connect their core systems to the SWIFT
network.
Ripple process
Although it happens within seconds, the Ripple process is holistic,
including rich information exchange, liquidity provision (ie providing
the funds at the beneficiary end), and currency conversion (ie FX).
By contrast, the TT method provides minimal information, liquidity
through correspondents, and no conversion (and takes hours or
days, and costs more).
Instead of using fixed correspondents (as used for TTs), Ripple

implements an automated instant auction for liquidity provision and
FX, thus assuring best price execution. Banks can restrict their
requests for quotation to counterparties matching specific
requirements like rating and regulatory standing. KYC and AML
compliance is of course covered.
From corporate treasury perspective, this is analogous to using an

eFX platform to get quotes from multiple banks (except that it is
purely bank to bank).
There are four key stages:
1. Get Quote: The originating bank sends out a request for

quotation across the Ripple network for the payment in
question. Quotes received in reply include FX rates and fees
as well as compliance requirements.
2. Accept Quote: The originating bank accepts the best quote

for which they can meet the compliance requirements. The
beneficiary bank can then lock the quote. At this point Ripple
blocks funds in the two banks ledgers something like a sub
second escrow arrangement (without transfer of title at this
point).

3. Submit Sending Payment: The originating bank transfers the
funds out of the payers account and through ILP to the
beneficiary bank.
4. Submit Receiving Payment: The beneficiary bank confirms

that funds have been credited to the beneficiarys account.
The Submit Receiving Payment signifies that funds have been

credited to the beneficiarys account. All of this happens within 1 or
2 seconds. As noted above, this is both more holistic and less
complicated than the current TT process, not to mention much
faster and cheaper.
GPII
In response to the challenge from Ripple, SWIFT have launched
their Global Payments Initiative (GPII). Leveraging the current
SWIFT messaging and correspondent banking that are the
backbone of old cross border payments, GPII is basically a set of
rules to commit banks to behave more reasonably in cross border
payments, supported by payment tracking and data to monitor
adherence to these new rules.

The rules are encapsulated in the SLA (service level agreement)
that banks must sign to join GPII. This SLA discourages banks from
float (theft of value days), opaque charging, and delays.
To support this SLA, SWIFT have built an observer system so that

partner banks can monitor the SLA compliance of their partners
across the system.
To entertain the payment originators, SWIFT have developed a

payment tracker, on which the payments progress can be viewed in
near real time. This will be white labelled by banks for their clients.
The SLA is essentially a commercial challenge for banks. The

increased transparency will limit their rent extraction. (Some banks
internal processes may be so weak that they genuinely have trouble
complying with the SLA, but most corporate cash management
banks can do same day reasonably priced cross border payments
when they want to.)
The tracker is more of a technical problem. First, some banks may

have difficulty tracking payments through their systems at all
(though that would be worrying from a control and regulatory
perspective). Second, it requires the creative use of MT199 free
format messages (with formatted data inside them) to achieve the
requisite updates. (Trade for corporates similarly uses MT798 free
format messages to send L/C related messages.) Although it is
notionally good old fashioned SWIFT messaging (MT was designed
for telex in the 1970s), implementation is akin to a new system.
Although SWIFTs 10,000 bank members would appear to give GPII

a big head start, it is far from clear how many banks will end up
joining GPII. The take up rate amongst banks for SWIFT for
Corporates has been agonisingly slow; ditto for trade.
Ripple vs GPII

It should be clear by now that Ripple offers a faster, cheaper, and
more complete process. The inclusion of FX gets customers away
from the exorbitant board rates that banks currently apply for
cross border payments. The auction process will result in better
rates and fees for both banks and their customers.
The speed and upfront fees facilitate auto reconciliation and will
open up new ways of doing business. It could even eat into credit
card flows.
Here is a comparison between Ripple and GPII:
RIPPLE GPII
Speed Seconds Hours or days
Fees Lowest possible Disclosed
FX Best possible Determined by bank board rate
Data Full delivery Full delivery
Tracking Not needed Yes
Technology Ripple & ILP SWIFT + new messages
No of banks 45 80
Difficulty Roughly equal Roughly equal
GPII is clearly an improvement on the status quo. Since it is just an

SLA with a tracker layered on top of existing correspondent banking
arrangements, it does not fundamentally change cross border
payments. There is a risk for banks that sticking to GPII instead of
opting for Ripple exposes them to even greater disruption (and
possibly complete disintermediation) in the future. At least Ripple is
bank centric. Other disruptors may be more aggressive.
(Additionally, the current correspondent banking system is already
severely weakened by regulators KYC and AML concerns.)
Caveat emptor
A word of caution about the current state of cross border payments.
Current generation cross border payments (aka TTs or SWIFT

payments) are too often slow and expensive, as described above.
Bank pricing is opaque and often exorbitant. Here are some tips:
- Cross border payments should cost USD5-10 (or less for high
volumes);
- Percentage fees are unacceptable;
- So called lifting fees (aka in lieu of exchange) are
unacceptable;
- Correspondent banking fees taken by intermediary banks are
unacceptable (your bank has commercial relations with its
correspondent that ensure their remuneration; there is no
need for additional fees);
- Float is theft the payer account should be debited on the
same value date as the beneficiary account is credited; the
payment may take time to execute, but there should be no
loss of value;
- Board rates (for FX conversion) can be negotiated, and banks
can apply pre-agreed spreads on live market rates when
motivated to do so.
If you have large volumes of low value cross border payments, ask
your bank about cross border ACH. This is a solution to reduce
cross border payment costs (though it may be slower to execute)
whereby the bank arranges a local low value payment (ACH) in the
beneficiarys country. (TT / SWIFT payments usually go through the
RTGS which is more expensive though faster.)
Conclusion
In a rational world, because it is faster and cheaper and no more
difficult to implement, I would expect Ripple to grow faster than
GPII. Logically, regulators should prefer Ripple because near
instant transfers vastly reduce liquidity and credit risks.
But we do not live in a rational world, and GPII has the benefit of
incumbency. Being driven by SWIFT and based on existing

correspondent banking arrangements, GPII may seem less
frightening to banks.
The good news for treasurers is that whoever prevails (or if they co-
exist), cross border payments will get faster and cheaper and that
is worth celebrating, and encouraging.

Acarate Consulting
Clients located all over the world rely on the advice and expertise of
Acarate to help improve corporate treasury performance.
Acarate offers consultancy on all aspects of treasury from policy

and practice to cash, risk and liquidity, and technology
management. We also provide leadership and team coaching as
well as treasury training to make your organisation stronger and
better performance oriented.
www.acarate.com
David Blair, Managing Director

25 years of management and treasury experience in global
companies
David Blair was formerly vice-president treasury at Huawei where

he drove a treasury transformation for this fast-growing Chinese
infocomm equipment supplier. Before that David was group
treasurer of Nokia, where he built one of the most respected
treasury organisations in the world. He has previous experience
with ABB, PriceWaterhouse, and Cargill.
David has extensive experience managing global and diverse

treasury teams, as well as playing a leading role in e-commerce
standard development and in professional associations. He has
counselled corporations and banks as well as governments.
He trains treasury teams around the world and serves as a

preferred tutor to the EuroFinance treasury and risk management
training curriculum.
david.blair@acarate.com
More articles here:

www.linkedin.com/today/author/blairdn

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Ripple vs SWIFT:

This requires getting 6 players linked up payer, payers bank,

Ripple vs GPII David Blair 2016 david.blair@acarate.com Page 1

(I exaggerate a little. I do see cross border payments going through

In these times of Venmo and PayPal and instant everything, this

In fintech parlance, this looks like a market ripe for disruption.

The benefits for corporates (and other customers) is clear in terms

Ripple vs GPII David Blair 2016 david.blair@acarate.com Page 2

Unlike some other fintechs, Ripple is bank centric. Banks connect to

ILP allows Ripple to connect existing bank ledgers (ie their

Ripple vs GPII David Blair 2016 david.blair@acarate.com Page 3

Instead of using fixed correspondents (as used for TTs), Ripple

From corporate treasury perspective, this is analogous to using an

There are four key stages:

1. Get Quote: The originating bank sends out a request for

2. Accept Quote: The originating bank accepts the best quote

Ripple vs GPII David Blair 2016 david.blair@acarate.com Page 4

4. Submit Receiving Payment: The beneficiary bank confirms

The Submit Receiving Payment signifies that funds have been

Ripple vs GPII David Blair 2016 david.blair@acarate.com Page 5

To support this SLA, SWIFT have built an observer system so that

To entertain the payment originators, SWIFT have developed a

The SLA is essentially a commercial challenge for banks. The

The tracker is more of a technical problem. First, some banks may

Although SWIFTs 10,000 bank members would appear to give GPII

Ripple vs GPII David Blair 2016 david.blair@acarate.com Page 6

Here is a comparison between Ripple and GPII:

GPII is clearly an improvement on the status quo. Since it is just an

Ripple vs GPII David Blair 2016 david.blair@acarate.com Page 7

Ripple vs GPII David Blair 2016 david.blair@acarate.com Page 8

Ripple vs GPII David Blair 2016 david.blair@acarate.com Page 9

Acarate offers consultancy on all aspects of treasury from policy

David Blair, Managing Director

David Blair was formerly vice-president treasury at Huawei where

David has extensive experience managing global and diverse

He trains treasury teams around the world and serves as a

More articles here:

Ripple vs GPII David Blair 2016 david.blair@acarate.com Page 10

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