Ripple has recently partnered with 61 banks in Japan and 2 in Korea to trial their new Ripple payment system. The XRP cryptocurrency was not utilised during this trial though. This has led people to believe that banks are only interested in the payment system, and not in XRP. This is not the case; XRP has the potential to significantly reduce international transfer fees for banks, and will likely be adopted after the payment system is fully operational. Not only do banks have an incentive to adopt XRP, they also want to increase its value. To see why the banks will want to use XRP, we’re going to look at the current cross-border payment process, how it will be changed with the implementation of the Ripple payment system, and what difference the XRP cryptocurrency can make.
The Current System
The current system for sending funds across borders is a large expense for banks worldwide. These costs come mainly from trapped liquidity, transaction errors, account management overheads, foreign currency exchange, and currency hedging – to the tune of billions annually. A lot of these expenses are due to the complicated route that money currently follows when being transferred internationally. An example of a typical cross-border payment is shown below.
In this scenario, the payment has to travel through multiple steps, each of which adds time, fees, and introduces errors. A typical payment takes 3-5 days to process, meaning that banks require 3-5 days worth of funds to be tied up at all times. When these funds are tied up, they are costing the banks money. On top of this, more than 12.7% of transactions can have errors, requiring more staff to deal with and further increasing the overhead of the banks.
The most significant payment-related cost for banks however is account management fees. For banks to facilitate international transfers, they need to pre-fund bank accounts around the world with all types of foreign currencies. This is so they can send, receive, and store whatever currencies they’re working with. As you can imagine, all of these accounts have associated fees and require staff to operate them, leading to massive operating expenses.
Introducing the Ripple Payment System
The Ripple payment system reduces international transfer fees for banks by addressing trapped liquidity and transaction errors. With the Ripple payment system, transactions are settled quickly and without error. A payment sent using this system will be settled in only four seconds. This cuts the payment processing times down by two whole days, greatly reducing the amount of funds that need to be locked up. This improvement alone reduces liquidity related costs by 65% over the traditional system. The elimination of transaction errors also reduces payment-related overheads by 48%.
Together, these improvements are estimated to save $18 billion in international payment costs each year – a 33% reduction from the current system. With only the payment system though, banks are still required to fund and manage many international accounts using different currencies. That’s where XRP comes in.
Using XRP with the Ripple Payment System
By using XRP alongside the Ripple payment system, liquidity fees and account management fees can be almost entirely eliminated. In this scenario, XRP would act as a bridge between every currency. When you want to send a payment, you would buy XRP with your local currency, send the XRP, and the recipient would exchange it for their local currency. Just like that, an international payment would be complete in only four seconds with minimal overheads. As payments would be nearly instant, liquidity related expenses are virtually 0 – a reduction of 99% from the current system.
The major advantage of this for banks is that they would no longer have to manage multiple foreign bank accounts for the purpose of sending and receiving different currencies; Account management fees would be slashed by 74%.
Even when you account for the fact that XRP is currently a volatile currency, overall savings of 44% from the current payment process are still anticipated. Compared to the 33% savings from the Ripple only system, and considering that there would be no associated setup costs, there is no reason for banks not to adopt XRP. It’s actually the opposite; banks are incentivized to adopt XRP and increase its liquidity and value, as this will decrease the volatility of the currency. By decreasing the volatility of the currency, banks can further increase the savings to a 60% reduction – a total of $33 billion annually. Ripple even offers an incentive program to early adopters of XRP, further sweetening the deal. The potential savings in each case are demonstrated below.
Basically it boils down to this: adopting the Ripple payment system saves banks money and adopting XRP doubles the savings. Banks love money, so it is almost guaranteed that they will adopt XRP. When they begin using XRP, they will want to increase the stability of the coin by investing massive amounts of money into it. Therefore, not only will XRP get adopted by banks, the price is going to skyrocket! If you haven’t got your Ripple cryptocurrency yet, take a look at the step-by-step Ripple purchasing guide for new investors.