The long-simmering rivalry between Swift and Ripple is nearing the boiling point.
Ripple announced 10 new bank customers Wednesday, including BBVA and Bank of Tokyo-Mitsubishi UFJ, bringing the total to 75. The blockchain-savvy newcomer offers a so-called Interledger Protocol for connecting payment networks and distributed ledgers that financial institutions can use to send and settle international payments among one another. Potentially, this would allow them to bypass the traditional correspondent banking model in which a payment makes several hops across a network of banks that have direct relationships. It’s essentially an alternative to Swift, the incumbent and guardian of the correspondent banking model.
Rising to the challenge, the Society for Worldwide International Financial Telecommunication is adding some modern technology components to its messaging network, which is used by 11,000 banks. It’s working on a FedEx-style tracker for international payments called Global Payments Innovation that bankers have been raving about. GPI, which is due to go live May 23, will provide API access to real-time data about the status of an international payment as it passes through each bank in a correspondent banking chain. Banks will then need to build their own applications that present this information, dashboard-style, to their corporate clients; they may end up making it a screen in an existing electronic banking portal.
Swift has also said it will support blockchain technology for certain use cases. On Tuesday, it announced a blockchain proof-of-concept for nostro reconciliation, where banks hold foreign currency in accounts at other banks to facilitate foreign exchange and trade transactions. Wells Fargo, Bank of New York Mellon, Australia and New Zealand Banking Group, BNP Paribas, DBS Bank, and RBC Royal Bank are among those participating.
While the two organizations have a contentious relationship, both leave the door open to working together somehow, sometime. And their competition is bringing some fresh air and change to the dusty world of international banking.
Bankers acknowledge the need to bring global finance into the 21st century.
“I often tell this story: I travel all over the world because we’re a global transaction bank, I’ll land in a foreign airport and turn on my phone,” said Tony Brady, managing director and head of global product management for BNY Mellon Treasury Services. “Before the wheels even stop on the runway, I can talk, text or video anyone in the world. When you compare that to the cross-border payment experience, historically, depending on the originator and beneficiary and where the two locations are, we haven’t been able to say when the payment was going to arrive, how much it was going to cost, we couldn’t confirm when the beneficiary got the funds and it could take days depending on where those two end points are. The client experience we have historically delivered is not up to the standards of today’s technology.”
(Note to pedants: We are using the word “blockchain” in the broadest sense. Ripple and the systems banks are experimenting with work differently than the original bitcoin blockchain, though they probably would never been conceived without it.)
Ripple has openly criticized Swift several times, particularly since Brad Garlinghouse took over in November as CEO of the startup from the more diplomatic Chris Larsen.
“What we hear from customers is they want a better system,” Garlinghouse said. “I don’t think you can make a horse and buggy keep up with a race car. You can whip the horse faster to make the buggy go faster, but meanwhile a technology shift has occurred.”
Last month, Ripple poached Swift executive Marjan Delatinne, who had been leading customer engagement for Swift’s GPI. Last year, the company, based on San Francisco hired former Swift board member Marcus Treacher.
Swift executives insist their bank members are not quite ready to put large payments on a distributed ledger, and that the young technology can’t handle all the correspondent services for which banks turn to the Belgium-based cooperative.
“When we built GPI, we talked to banks about what should the solution look like?” said Stephen Grainger, head of North America at Swift. “It was formed to address the challenges they saw they needed to address to ensure they had a continuing role: How do we provide more speed and certainty to banks and clients? But what’s important for corporates is not necessarily having every payment made in real time. It’s that certainty that at the end of today I will know my cash position and I will know what I need for tomorrow.”
According to Grainger, Swift has talked with its members about using a range of technologies for payments, including distributed ledgers.
Though the banks are all interested in innovation, “there is a recognition in the industry that perhaps distributed ledger technology at this point isn’t ready for the wholesale application to manage all correspondent banking,” he said.
BNY Mellon’s Brady, who is a member of the Swift GPI Vision Group, backs this point.
“Our early view is that while blockchain and distributed ledger have a fair amount of promise, it’s a little early to try to tackle cross-border payments, particularly high-value cross-border payments where we’re putting millions of dollars at risk,” he said.
For any initiative to succeed in the cross-border payments space, it needs a recognizable standard, a network effect and regulatory engagement, according to Brady.
Another big-bank executive, who asked not to be identified, said he doubts blockchain technology will ever make sense for international payments because you could never get 11,000 banks to agree on something, as distributed consensus mechanisms require.
But according to Treacher, now global head of strategic accounts at Ripple, the company worked through that issue 18 months ago. The solution it came up with was the Interledger Protocol.
“We’re not forcing every bank onto one blockchain. The banks can keep their classic ledgers,” Treacher said. “Ripple interconnects. It’s focusing on the job of exchanging value really quickly, really efficiently without failure. And by interconnecting ledgers that are already there using cryptography and not forcing people onto these superledgers, our thesis is you can use blockchain tech to join up any ledger anywhere in the world.”
Brady and other bankers worry about regulators’ reaction to using a blockchain for payments.
“They view cross-border payments as high risk from a number of perspectives, and rightly so,” he said.
Garlinghouse countered that banks’ regulatory concerns come from people who don’t understand how Ripple works.
“We’re huge supporters of regulation. We sit on the Federal Reserve’s faster payment task force. We work with the central bank of England,” he said. “If someone’s challenging [Ripple’s compatibility with] regulation they’re trying to create fear, uncertainty and doubt because we don’t change the regulatory framework. The regulations that apply to a bank don’t change because they’re using a massively more efficient payment rail. Whether it’s a horse and buggy or a racecar, you still have to follow the rules of the road.”
Banks still have to conduct anti-money-laundering, know-your-customer, and Office of Foreign Asset Control checks on the Ripple platform, he noted.
Brady also noted that BNY Mellon is involved in blockchain-related proofs of concept for some things. For instance, it’s a member of a consortium called Utility Settlement Coin that plans to use virtual currency for post-trade settlements between banks. It’s signed on for Swift’s blockchain proof of concept for nostro reconcilement.
“Right now I would put my money on something like Swift GPI delivering a lot of value and having a lot of success quickly,” Brady said. “It’s leveraging a standard, it’s got network effect, and all the banks involved talk to their regulators every day. I think Swift GPI is the poster child for the kind of innovation we’re trying to move forward that deals with some of the fundamental issues we’ve been wrestling with,” such as speed of payment execution and transparency of payment cost and of payment status.
Garlinghouse responded that some banks are clinging to the old correspondent banking model.
“It’s in their best interest to do that and they’re facing the classic innovator’s dilemma,” Garlinghouse said. “So it’s not at all surprising to me to hear that some banks, particularly BNY Mellon, say that. On the other hand, we have many corporations and treasurers dealing with large sums who want and see the benefit of these technologies to their business.”
Some common ground
Grainger said Swift would be open to its members using a modern system like Ripple’s for payments while keeping other parts of the correspondent banking relationship the way they are.
But he also said this could be tough to implement.
“A huge amount of investment is made in banks’ existing infrastructure and that infrastructure is still fit for purpose at many firms for a large number of use cases for which correspondent banking is a mechanism is used to transfer money,” he said. GPI uses existing rails and overlays them with its track-and-trace capability.
“It may well be that Ripple plays an important role going forward in components of correspondent banking model, but it’s most likely to be the case that Swift will continue to play a role in that landscape, too,” Grainger said. “And ultimately banks and their customers will dictate what is the right model.”
Garlinghouse acknowledged that Ripple and Swift share a common goal: help banks run more efficiently.
“We’re both seeking to make banks more successful,” he said. “In that context, I think there can and should be opportunities to partner.”
But then the claws come back out.
“We’ve reached out to them many times and they’ve been closed minded to the benefits of blockchain solution and instead remain focused on the correspondent banking paradigm,” Garlinghouse said. “Blockchain disrupts that paradigm. You can’t put the genie back in the bottle. You can’t hold on to technology and solutions from decades ago, you need to listen and respond to new customer needs.”
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