Earthport, a cross-border payments service provider, has partnered with the digital currency network provider Ripple Labs to allow enterprise businesses, including banks, to more efficiently transmit money worldwide.
"The problem in the past of moving money cross-border is a combination of dated technology and a dated model," said Hank Uberoi, CEO and executive director of Earthport.
Correspondent banks have been used for decades to move money from one country to another, but many companies, especially in the cryptocurrency space, are trying to disrupt that model. Ripple Labs provides a network that enables real-time payments across borders in different currencies, including Bitcoin and national currencies.
A miniscule amount of the protocols own digital currency, Ripple (XRP), is destroyed with each transaction to eliminate the instances of spam on the network. This disincentives bad actors or bots to get on the network and send a lot of small transactions in an effort to overload the system, like a distributed denial of service attack (DDoS).
There's been an Internet for information for more than 20 years, but "there's now the notion of the Internet for value," said Chris Larsen, co-founder and CEO of Ripple Labs.
Through Earthport's partnerships with countries' local banks and clearing systems, its clients can send funds into another person's bank account without going through a correspondent bank. Earthport currently offers its services in 60 countries with 20 more coming soon.
Earthport serves banks, money transfer businesses, e-commerce companies and payments aggregators. Its clients include two of the top four global banks and four of the top 20 U.S. banks; Bank of America, HSBC, Western Union, Xoom and American Express use Earthport services.
With Ripple, Earthport clients will now be able to send money in real-time to bank accounts. There's "less chance of fail in the middle, which happens all the time in correspondent banking," said Larsen.
Plus within correspondent banking a handful of banks make the foreign exchange rates, but with digital currency systems like Ripple, banks will have to "compete on every single global payment," Larsen said. The increased competition, he said, will likely push the cost of these payments lower.
Using the Ripple protocol is completely free; Ripple Labs makes money on protocol through the Ripple currency. As more people begin using the protocol, the value of Ripple will increase. The company could also make money on value added services such as helping clients with specific integrations.
Earthport charges a flat, per-transaction fee.
"Where [our clients] find real value is in the larger-volume, lower-value transactions," Uberoi said. About 80% to 90% of all cross-border transactions by volume make up about 10% to 15% of all cross-border transactions by value, he said.
The Federal Reserve Banks recently unveiled an idea for a faster payments system in the U.S., and have also hinted that the business model for faster payments would likely involve person-to-person payments and emergency bill payments.
While Bitcoin businesses have focused more on consumer and merchant adoption, Ripple Labs has positioned itself as a platform for enterprise companies, including banks. In May, Fidor Bank AG became the first bank to start using the Ripple settlement protocol. Then in September two U.S. banks began using Ripple: Cross River Bank in Teaneck, N.J. and CBW Bank in Weir, Kan.
The partnership with Earthport will likely accelerate the Ripple protocol towards critical mass, since each bank or partner will need to only connect into Earthport's hub to use Ripple.
The issue with new payment systems has always been a chicken-and-egg problem in terms of consumer and merchant adoption. Consumers are unlikely to adopt technology that they can't use at many merchants, and merchants are hesitant to adopt a technology that most consumers don't use.
Earthport's client banks might be more apt to adopt cryptocurrency because Earthport will continue to handle the know your customer compliance requirements when onboarding new customers, Uberoi said.
While the partnership and the growth of Ripple and other cryptocurrency protocols seem to be attacking the incumbents, Uberoi said banks will continue to be relevant for higher-value transactions.
"The Ripple/Earthport announcement is yet more evidence that we are beginning to see a legitimization of new networks that were until very recently seen as a threat to incumbents," said Nick Holland, retail payments practice lead at Javelin Strategy and Research. "Remittance is an obvious target, but it probably won't be long before we see Ripple and others as a disruptive force in domestic P2P and other areas of consumer payments."
Traditional financial services companies will be challenged to integrate these protocols without cannibalizing existing revenues, or being altogether circumvented, he said.