June was a busy month for cross-border payments — done across currencies and time zones, between consumers and corporates. Going by a simple perusal of headlines, cross-border was, has been and will be in the cross hairs of many a payments player, across many a strategy, via fiat or digital coins, that aims to fix what’s broken in transactions done across currencies — especially in B2B.
Visa, of course, announced its B2B Connect network, which will streamline 30 global trade corridors (to start) via fiat-based transactions settled over blockchain.
And also in June, one day before the Libra news broke, MoneyGram and Ripple struck a two-year strategic partnership to use Ripple’s xRapid product and leverage the XRP cryptocurrency for foreign exchange settlements in MoneyGram’s cross-border payments. The strategic move also has a financial component, as Ripple took a $50 million stake in the money transfer company. The latest news comes after a January 2018 announcement that the two firms had begun piloting XRP in transactions to “modernize” payments, and where transaction fees would come in at just fractions of a penny, compared to as much as $30 per transaction for payments done in bitcoin. The June news was an extension of that pilot, said the firms.
The jury may still be open as to which approach, or approaches, will find the surest footing. Libra, after all, is already under the collective lenses of global regulators over privacy and security concerns. Cryptos in general have been something of a Wild West that, in at least come cases (notably with bitcoin, a marquee name) has been marked by breaches and hacks and outright digital theft.
In an interview with PYMNTS, Kahina Van Dyke, Ripple’s SVP of business and corporate development, shared her views on this partnership, and its goals.
For the past 20 years, Van Dyke said, cross-border B2B payments were slow and marked by friction — but something that the ecosystem lived with because, eventually, the money got there.
“We just kind of dealt with a system that we knew was inefficient but frustrating,” she remarked.
However, with the advent and advances of technology — and shifting of consumer expectations, driven by eCommerce, of how payments should and can be done — Van Dyke said that alternatives to the way it’s always been done have emerged.
In the B2B space, she said, technology underpinned by blockchain and digital assets and cryptocurrencies to transport data and payments has allowed payments to take a quantum leap — and have a cross-border landscape that allows for instantaneous settlement. It’s an opportunity, Van Dyke told PYMNTS, that we’ve never had before.
That’s especially important against a backdrop where Van Dyke said the traditional banking system for commerce done across borders had not been built for smaller transactions or for companies that do not have multiple bank accounts all over the world.
Today’s systems, she said, are more geared toward giants like Coca Cola, with a global network of suppliers. Smaller merchants — even micro merchants — find it prohibitively expensive, or impossible, to have such presence and, she says, are effectively shut out of the opportunity to tap into new markets.
The FX market is efficient for “larger” or dominant currencies such as the euro or the U.S. dollar, she noted, but is far less liquid for other currencies tied to regions as far-flung as Latin America or Southeast Asia.
“If you’re a small coconut oil farmer in the Philippines,” she said, “or a basket maker, you do need to have your money and have a way to efficiently transact across the border in order to grow your business.” In addition, she said, many of these merchants in non-European and non-U.S. markets seek to trade with one another.
On a grand stage, embracing the digital conduits that can smooth cross-border commerce — especially digital assets that act as bridge currencies — has been a challenge, she noted, because the global banking infrastructure works in an entrenched way.
To offer an illustration, she said to PYMNTS, “if I told you there was an airplane that is twice as fast and is even more fuel-efficient, you might say, ‘I love that airplane.’ But the challenge is that you have to change the engine while it is in flight …that’s where we are as an industry. We know the future is coming, and it’s a transitionary period from the old inefficient infrastructure.”
The Crypto Advantage
The advantages inherent in cryptocurrencies lie with speed and security (via cryptography), Van Dyke told PYMNTS, offering an illustration of how the status quo in cross-border can be upended.
Today, speaking in terms of general fund flows, if one party wants to transact or send money across borders, say from the U.S. into the Philippines, money must be “pre-deployed” in the Philippines in a bank account located there. MoneyGram, for example, must pre-fund those accounts, and MoneyGram must pay its agents, who in turn pay out cash on site (here, in pesos).
Van Dyke noted that tying up capital is an expense to MoneyGram, as the firms needs to have bank accounts all over the world — and also represents a risk assumed by the company as money moves between accounts and can take several days to settle.
By way of contrast, she said, the partnership between Ripple and MoneyGram, through which the latter uses XRP as a form of bridge currency, means that senders in this case take their U.S. dollars, convert them into XRP, and then convert them to pesos at the recipient’s end of the transaction. The transaction can be settled within a minute rather than several days. Van Dyke likened the process to a near-instantaneous transfer of real value, whether done for consumer-focused or B2B transactions — a huge advantage over relying on a promissory note underpinned by the correspondent banking system.
“I think what we’re going to see is that is actually going to be the start of a massive efficiency in a system that just hasn’t had a lot of other options,” she told PYMNTS, “marked by a democratization of currencies. And new entrants will likely see opportunity in the cross-border B2B payments markets, benefiting individuals and small businesses.”
“Those people and businesses,” she said, “will get to participate, more and more, in the prosperity around global commerce,” she said.