To build a proper cross-border payment network, the financial services industry must move beyond what’s already in place, according to Sendi Young, the new London-based managing director for Ripple in Europe.
“The challenges with today’s underlying payments and banking infrastructure are widespread and centered around outdated technologies that are slow to transact, incur high fees, lack transparency,” Young said.
Young will be charged with championing the expansion of the firm’s blockchain-based RippleNet network among EU institutions. In a recent interview, Young discussed how distributed ledgers can help banks overcome legacy payment processing, the potential for open banking in Europe and elsewhere to expand faster payments and liquidity for small businesses, and why she thinks banks that don’t have a strategy for crypto are in trouble.
“[Banks] must adopt new approaches to stay relevant and keep up with competition, such as adopting blockchain and digital assets,” Young said. “It’s clear we’ve hit an inflection point in the financial services industry. The companies that aren’t thinking about adopting some type of crypto strategy will inevitably be left behind.”
Ripple is widely known for the XRP token, which has been subject of a dispute between the Silicon Valley company and the SEC over how the cryptocurrency should be regulated. Ripple has additionally built a successful business in using XRP’s underlying blockchain technology to support faster cross-border payments at lower cost by removing the need for correspondent banks. Initially banks viewed Ripple’s network as a threat, but in recent years Ripple has added bank partnerships, winning business from banks eager to improve e-commerce technology.
“RippleNet started out with a focus on remittances because there was significant friction that was underserved by the current financial system for remitters,” Young said, adding new services for the age of open banking and embedded payments are designed to enable faster payments and credit for small merchants.
This credit product, called Crypto Line of Credit, helps provide on-demand liquidity. Ripple uses the XRP token to bridge two currencies, allowing firms to eliminate prefunding of bank accounts in the payment’s destination market.
Working like a “send now, pay later” service, Crypto Line of Credit allows a small business to access credit from Ripple, which locks in a rate for the cross-border transfer. That business’ financial institution uses XRP to make the payment, then the business pays Ripple back, adding a fee based on the borrower. A quarter of Ripple’s customers are based in Europe, and on-demand liquidity has grown 250% in 2021 over 2020, Ripple reports.
“[These companies] didn’t have access to the same services … and sometimes had to resort to venture capital money to fund payments,” Young said.
Ripple has expanded on-demand liquidity to other markets such as Japan. Last week Ripple opened an XRP-to-traditional currency transfer corridor between Japan and the Philippines. The corridor links SBI Remit, a Japanese money transfer provider, with Coins.ph, a Philippine mobile payment service and SBI VC Trade. The payment rail converts traditional currency to XRP and then back to traditional currency on the receiving end. SBI Remit views the collaboration as a way to “unlock trapped capital” and plans to connect with other partners on RippleNet to build additional payment and financial products off of the enrolled base.
The cross-border product expansion, merchant credit and added product diversification rely on open banking, or sharing data between banks and third parties such as payments companies. When combined with blockchain technology, open banking can enable risk, authentication, digital invoicing, supply chain management and faster processing for cross-border payments.
“Open banking complements and shares our vision,” said Young. “The ultimate objective of the U.K.’s Open banking and the EU’s PSD2 regulations are to provide people with greater choice, value and access to financial services.”
Young joined Ripple about a month ago following five years at Mastercard, where she worked on bank-fintech partnerships and was most recently the lead for the global Fintech & Digital Segment for the card brand’s data and services unit. Among her duties at Mastercard was helping banks build real-time payment rails, adopt open banking and deploy artificial intelligence. She plans to use that experience to help lead similar product development and bank collaboration at Ripple.
“In an industry that is still largely using infrastructure built before the internet to process cross-border payments, this traditional model no longer works for the modern world,” Young said.
Blockchain can help companies catch up. For example, a payment service provider can initiate a payment from a consumer’s bank account in a country such as the U.K., via an application programming interface the consumer authorizes; then use RippleNet to send the funds to the Philippines in a few seconds, Young said.
The next step is to use Europe’s PSD2 regulations, emerging standards in other countries and general trends toward bank/fintech data sharing to expand beyond payments, according to Young. Open banking can help overcome legacy messaging standards and formats that can vary significantly across countries, requiring a lot of manual intervention, and therefore delays, and inaccuracies, said Young, adding transacting across different currencies requires FX transactions and exposes parties to exchange rate and settlement risks.
“[We] want to enable a world where value flows as easily as information on the internet,” Young said, adding thus far that’s focused on addressing inefficiency in moving money across borders. Since blockchains are decentralised, banks and other financial institutions can communicate payment information to each other, bi-directionally in real-time and settle the payment instantly and seamlessly. This can overcome a fragmented payment system, even within the EU, where there is a culture of cross-border commerce.
“Particularly in Europe, despite the introduction of euro as the common currency in 1999 and many EU initiatives, cross-border payments remain a challenge and a patchy, painful experience in many parts of the region,” Young said, adding this is partly due to the coexistence of 8 domestic currencies besides the Euro, and slow adoption of SEPA Instant Credit Transfer Scheme.
Ripple is offering an alternative to the Swift rail as Swift works to improve its own ability to enable faster cross-border payments. In June, Bank of New York Mellon, Citigroup and other banks agreed to test Swift’s new transaction management platform, which is scheduled to go live in 2022. Swift recently launched Swift Go to support lower rates for cross-border payments under $10,000. And Citigroup recently launched a platform that uses Swift’s global payments innovation service to improve tracking for international transactions.
Ripple is making these moves as market demand increases for payment technology that drives partnerships between banks and third parties. While Ripple focuses on peer-to-peer transfers and cross-border payments for online merchants, the applications of fintech/bank partnerships and open banking can support much broader financial services.
“Ripple has been making a jump into embedded finance. Some call that banking as a service or contextual banking,” said Enrico Camerinelli, a senior analyst at Aite-Novarica. “People make an example out of Uber, where the payment is connected to everything. If you want to run a shop that sells bikes, you have to take care of the store, the supply chain, sell bikes and do maintenance. All of these things led to collecting and making payments.”
The value of embedded payments is often tied to large technology companies offering banking and related content through a payment credential, similar to Apple Card, which uses a partnership with Goldman Sachs to issue cards, accept payments, and link to banking and retail services through the bank. But it’s much broader than even that, as a payment or transaction or credential can be tied to almost any part of a business’ operation, Camerinelli said.
The demand for technology that incorporates payment credentials or payment processing into myriad services is pushing investment in the sector and allowing more companies to expand their services. Marqeta’s IPO was based partly on the belief that payments will need to be embedded in almost all software in the future.
“Someone who is opening a physical store also has to figure out how many other digital channels they want to be in. And an embedded fintech provider does that for you,” Camerinelli said.