Ripple’s payments network, that allows institutions to facilitate low-cost international money transfers without the intermediation of large banks, has signed its first two US banks as customers.
The two banks – Bank of Topeka, Cross River Bank – are not household names.
Nonetheless, their use of the Ripple model marks a milestone for the Silicon Valley startup. And it could open the door for America’s embattled regional and community banks to recover control over a cross-border commercial banking business that was long ago ceded to bigger institutions.
Patrick Griffin, Ripple Lab’s executive vice-president of business development, said the system allows smaller banks to transfer money abroad by connecting to existing Ripple clients, such as Fidor Bank of Germany. And they can provide low-cost cross-border transfer services to other small US banks.
The big benefit, he said, is that smaller banks would no longer need to deal with “correspondent banks” such as J.P. Morgan & Co., HSBC Holdings, Standard & Chartered and Wells Fargo, to intermediate this business. That should also do away with the accompanying fees, foreign exchange “spread” costs and, most importantly, the large collateral commitments that the bigger banks periodically demand to act as the middleman.
“This is the first viable alternative to correspondent banking in about 40 years,” said Griffinin. “Regional banks can now move money bilaterally to other regional banks without having to relay those funds through an intermediary.”
The software program that runs Ripple, known as its “protocol”, allows for direct fund transfers and foreign exchange transactions between institutions. A network of computers running that program works together through a system of consensus to ensure trades are executed, confirmed, cleared and settled, in multiple currencies.
It promises small institutions the capacity to trust each other in a direct transaction without having to put up large amounts of capital to back up those transactions or outsource elements to big custodial and foreign exchange banks. In theory, that should allow them to offer significantly cheaper foreign exchange and bank wire services to their customers.
This kind of “decentralized” network – which collectively takes on the work done by middlemen institutions in the traditional system – has similarities to bitcoin and other cryptocurrencies. How? Its member computers work off a common set of software-driven rules to confirm transactions. But whereas transaction confirmations can take 10 minutes or more on bitcoin, it takes seconds on Ripple.