Ripple Labs Inc., a venture capital-backed challenger to Western Union and Bitcoin, is for the first time gaining access to the U.S. banking system, and security hawks are raising eyebrows.
Cross River Bank in Teaneck, N.J., and CBW Bank in Weir, Kan., will be the first lenders in the United States to transact currencies across borders through Ripple's bilateral money settlement platform, which seeks to challenge the money wire and currency exchange networks that have existed since the postwar accords of Bretton Woods.
"We only need one bank in Europe and one bank in the U.S. to connect with Ripple to create a viable corridor to move money, and without fees," said Patrick Griffin, head of Ripple's business development.
Ripple's ascension in the shadow of Bitcoin appears to be a step away from the digital currency mania that has consumed some, and a step closer towards disrupting what it sees as a foreign exchange market mired in rigging scandals and operated by money centers that reap millions of dollars without passing the benefits of efficiency to consumers.
The Parisian-born Gilles Gade, the chief executive of the $265 million-asset Cross River, predicts users will flock to the service, which forces market makers, consisting of Wall Street hedge funds, to openly bid for business. "Right now there isn't much choice to transfer money from point A to point B. The cost for an international wire is $35-$50, plus currency exchange, and customers get killed on the transfer," Gade said.
Cross River will charge a small fee and require new users to open an account, Gade said.
The service is not yet widely tested. It is unclear what the effect of a stronger dollar may have on the direction of money flows and whether that will affect U.S. participation. The dollar has risen for 10 straight weeks on anticipation of lower rates.
U.S. lenders' gradual acceptance could prove to be a turning point. Ripple already enjoys funding from venture capitalists and tech-backers, including Andreessen Horowitz, Lightspeed and Google. Others include Arjan Schuette of Core Innovation Capital, which has invested in an array of alternative lenders.
Previously, the most significant obstacle to Ripple's growth was lenders' refusal to get on board because of security fears, or perceptions of it being a competitor. Goldman Sachs' head commodities analyst, Jeff Currie, suggested in a March research note that Ripple and others could grow but they were not yet a "serious threat."
Dangers abound, said Stephen Ranzini, the CEO of University Bank in Ann Arbor, Mich.
"The problem is a lack of regulation," Ranzini said. "University Bank will not engage in this kind of activity. You have to prove in a way that meets regulators' expectations that you can prove customers' identity, authenticate them and encrypt data from beginning to end."
Ranzini does support the idea of innovation in payments. In 1999 he created his own remittance alternative but has now decided to sell his patent after coming to terms with what he called insurmountable risks. The sale will take place at auction next month in October, he said.
Ripple downplays such concerns, saying it is working in consultation with regulators.
The $12.4 million-asset CBW will in a matter of months offer any interested person to visit CBW's website GlobalRemit.com and send money to a number of locations, including India, said Suresh Ramamurthi, CBW's chairman and chief technology officer. Users will not have to be a CBW accountholder, though it will charge them what it described as a small fee.
It is unclear how CBW will partner with an Indian institution, and which institution that may be. Ripple does not have an exchange partner currently in India, and it is unsure what the foreign gateway may be, its spokespeople said.
"We have our own technology that enables us to verify people's credentials," Ramamurthi said regarding the firm's authentication procedures for its remittance website. He did not respond to further requests for information.
At the moment, the only foreign transactional partner is Germany's Fidor Bank, which requires users to have an account or to open one. French and English banks may be lined up next to partner with Ripple, a person familiar with the discussions said.
The most controversial aspect of Ripple may involve its digital currency, according to Garrick Hileman, economic historian at the London School of Economics.
In March, original co-founder Jed McCaleb gave Ripple currency holders a taste of what could go wrong when he announced online his intentions to dump his holdings of the currency, devaluing the coinage by 65% in a day. Chris Larsen, also a Ripple founder and its CEO, convinced McCaleb to withdraw his investment gradually and overtime to preserve liquidity threatened in the plunge. (Larsen was a founder of E-Loan and Prosper.com.)
The incident was reminiscent of the volatility associated with other new payment systems. The now-defunct Bitcoin exchange Mt. Gox last year suffered a hacker breach that swiped $460 million from customers. McCaleb was also the original founder of Mt. Gox, but sold it to Mark Karpelès, who controlled the exchange at the time of its February 2014 bankruptcy.
Ripple's founders, employees and investors control 25% of its digital currency in circulation. The Ripple currency, however, has little bearing on Ripple's remittance technology, according to head spokesperson Monica Long. "It doesn't matter because the Ripple [remittance code] functions as a money transfer infrastructure independent of [Ripple currency] value."
Cross River's Gilles Gades agreed, emphasizing that for bank customers, the Ripple network does not have to use digital currency for transactions between agents. "That is important to remember," he said.
Ripple claims to not profit at all from remittance engagements with partnering lenders or its customers. Its earnings will come when customers see the value in Ripple's universal coinage and buy it, Long said.