A decade ago, New York Times columnist Thomas Friedman gave birth to an intellectual debate with his declaration that globalization – driven by technology and the digitization of business and trade — had rendered the world effectively “flat.”
And while that may have been true in 2005 of many areas, the leveling of the commerce playing field described by Friedman had not quite come to the payments part of this much more democratized, and flatter, global world.
International trade was expanding like a house on fire – yet moving the money between those trading partners was then, and remains, anything but flat, according to Earthport President Jonathan Lear.
“The world is getting smaller and payments needs to move faster,” Lear told MPD CEO Karen Webster in a recent chat. “The legacy way of making cross-border payments, well there is only one way to describe it – it’s a real bloody mess.”
The problem, Lear says, is that legacy systems are no longer “fit to purpose.” In the not so distant past, cross-border payments between businesses were generally high dollar transactions between very large players. Today, the average value of individual transactions may be smaller – but there are many, many more of them.
This places a huge strain on the “spaghetti network” of correspondent banks that is the legacy system for moving money around the world. A spaghetti network that left businesses sending off payments and not being entirely certain when they would get there and if, when they arrived, they would be what the recipient was expecting (after fees and currency conversions).
“The essential problem in moving funds from country A to country B,” Lear told Webster, “is the network of bilateral relationships [that exist] - and that doesn’t create transparency or predictability. It presents a very complex, costly and cumbersome process [to move money around the world]. And we think there is a better way to address that.”
That was the proposition that Earthport set out to fix in 1997, well before anyone recognized just how flat the world would become. Its proposition was to simplify the movement of money around the world by adding a software layer on top of the network of intra-bank relationships that allows Earthport clients, through a single connection, to access a “simpler, more cost-effective global payments network.”
Until today, Earthport has offered two options for moving money on their rails: fast and very fast. The fast option works through what is essentially Earthport’s global ACH network and takes about a day for funds to clear. The faster option connects to the various “faster payments” schemes around the world and can even enable transactions in an hour.
But today, through a partnership that the company is announcing with Ripple Labs, Earthport can do that one better: It can now enable payments between global trading partners in real time.
Ripple Labs is the creator and controller of the Ripple protocol, an open source distributed ledger or blockchain application that allows for the exchange of value in real time. Different from bitcoin, Ripple functions as a payment network (that supports a variety of currency exchanges), whereas bitcoin is designed to function as both a currency and a payment network and a currency.
Lear notes that adding “real time” to its already fast and faster global payments capabilities gives his clients the ability to have the best of both worlds: the ability to leverage a new “instant payments” capability via a very new payments protocol by doing so via a regulated, compliant and very secure network partner like Earthport.
“We want to be at the front leading [the innovation for our clients]. We’ll do the integration, we’ll do the due diligence, handle compliance and put together the whole model,” Lear explained. “And then we will industrialize this for our clients. We don't want clients worrying about new innovations. We want them to lean on Earthport as the expert in cross-border payments so that we can drive that innovation for them.”
OK, you may be asking (as Webster did), fast and faster – especially in an hour – already seems like a pretty good deal. Instant sounds good, and is undeniably faster than one hour, but will it really make that much of a difference to recipients? Is there a business case for instant payments that is better met by Ripple than by a tweak to the existing Earthport business model?
That's something that Lear says just depends.
“We don't think real-time payments is a panacea for every problem the market wants to solve, but we know it does solve for a certain subset [of businesses] that want or need immediacy of payment.”
Instances in which markets are thin because the goods are scarce — classic cars or artwork for example. In those cases, money may need to change hands before goods can be surrendered, and while waiting an hour isn’t the end of the world, getting access to something instantly because they are able to transmit funds instantly may be desired.
“When you have a scarcity of merchant exchange - high profile art, classic cars - and you need confirm you buyer has funds and they are in your account before you hand over the keys, banks can use this service to connect to their local branch networks around the world and get access instantly,” said Lear, noting that a surprising number of FIs actually have difficulty achieving instant transactions even within their own networks.
And for those cases where there is a need and a demonstrable ROI, Earthport can now add an option for banks and trading partners. Lear believes more distributed ledger innovation is coming, and wants Earthport to be on the ground floor to offer those innovations at its full potential.
“We have an existing, proven and regulated process that can now enable this new technology right within that framework. We don't think anyone else has done that, or could do that to the extent that we have,” Lear emphasized.
The payments world, particularly when it comes to cross-border, is complicated and has at times bordered on incomprehensible, and Lear says Earthport, with the integration to Ripple Labs, is doing what it has always done: bringing more order to the chaos, and doing it in a way that is easy for its customers to access. If the future of payments is in being instant, Earthport, after a long vetting process, has decided Ripple Labs is the place to start — and that vote of confidence may be what their clients need to get moving toward even faster, fast payments between trading partners around the world.
A vote of confidence that might extend also to Ripple as it sets its sights on expanding its own global payments capabilities to the hallowed halls of banking around the world.