In 1973, in order to simplify and accelerate settlements between banks, the SWIFT (Society for Worldwide Interbank Financial Telecommunications) transfer system was created. It is a system in which banks around the world exchange data and information about payments. It is used by thousands of financial institutions around the world. The system, today, provides about 1.8 billion messages per year.
The SWIFT system combines several components: its own information transmission network, software that makes it possible to connect to the network and an algorithm for assigning each participant a unique SWIFT code. It is the SWIFT bank code that makes it possible to accurately determine the sender / payee and make the transfer within the shortest possible time. The risk of error in this case is minimal, because the SWIFT code is unique for each participant in the system and contains all complete information about it.
If one bank needs to send a payment or confirmation of a transaction to another bank, it prepares a message, encrypts it with the help of an encryption system created by SWIFT, and sends it through a special terminal to its counterparty. The counterparty, receiving the document, decrypts the message and applies it.
With the SWIFT system, everyone can transfer money to each other in any required currency. The goal of uniting into a single payment system was the desire to transfer funds from one bank quickly and safely to another, regardless of borders between countries and other obstacles.
However, SWIFT has some significant flaws. The current standardized method of wire transfers is very slow. It takes hours and often days to pass through different banking checkpoints. Moreover, cross-border payments are also expensive and opaque. Previously, an alternative to SWIFT simply did not exist. But with the advent of distributed LEDGER technology, the situation began to change. And it turned out that the blockchain is ready to offer its services in the field of interbank and cross-border transfers. At the same time, the use of DLT makes this process faster, more technological and cheaper. So, there is an alternative to the "old" SWIFT?
Ripple in the limelight
Ripple can change the rules of the game. With a fast and cheap system of international payments, Ripple can carries out operations in just a few seconds and with minimal cost of transaction. Within the framework of the Ripple ecosystem, several products are being developed (xVia, xRapid and xCurrent), which are able to become serious competitors of SWIFT. Major financial institutions are already showing interest in Ripple and Over 100 companies worldwide have adopted RippleNet, the Ripple blockchain, to guarantee fast, frictionless transactions.
xCurrent is a Ripple system designed to enable banks to transfer funds across borders quickly and efficiently using RippleNet. Through this system, financial institutions block capital in foreign accounts, called nostro accounts, to ensure the liquidity of cross-border transactions. This allows the receiving party to get money from the liquidity pool offered by the nostro accounts. Companies that already use this blockchain product claim that it is faster and safer than SWIFT.
xCurrent can reduce the transaction time to 3 sec, outpacing Ethereum (ETH) and Bitcoin (BTC) transaction time of 2 minute and +1 hour, respectively. xRapid is also really interesting to banks, but there is one problem, it is the volatility of the Ripple token XRP. However, Ripple officially stated that all companies participating in the pilot projects using xRapid were able to save a lot. Compared to regular payments, they saved from 40 to 70%. At the same time, the transaction time was about 2 minutes. In addition, financial institutions get rid of intermediaries who require exorbitant commissions.
As a result of this strong financial industry adoption, the Ripple cryptocurrency, XRP, is currently the fourth most valuable cryptocurrency by market cap. While you can buy XRP, it’s not intended for consumer use. Instead, it’s a token that provides liquidity for banks as they facilitate cross-border transfers. Unlike most blockchain technology that’s secured by a decentralized network of miners, Ripple is secured by a network of validating servers with an internal ledger that guarantee transactions based on consensus. Instead of mining rewards, all 100 billion Ripple coins are pre-mined, and Ripple Labs controls the dispersion of new coins. So far, there are 44 billion XRP in circulation, and Ripple Labs will release more as needed to control money supply.
SWIFT’s Response
In response to the blockchain disruptions, SWIFT launched global payments innovations (gpi). The upgraded service was aimed at increasing speed, transparency, and traceability, thereby easing reconciliation and improving treasury forecasting and predictability.
The initiative turned out to be a massive success for the Belgium organization, as more than 3,500 banks have so far committed to adopting gpi. Moreover, SWIFT says that more than 55 payment market infrastructures are already exchanging gpi payments, enabling domestic exchange and tracking.
Though SWIFT gpi uses the traditional SWIFT messaging network, participating financial institutions sign up to a new service level agreement, which commits them to end-to-end same-day processing of payments and up-front transparency of fees. Another key feature is a cloud-based tracker that enables banks to monitor the status of the payment as it moves along the correspondent banking chain and eventually reaches the recipient's account.
In February 2018, about a year after launch, SWIFT said that gpi was delivering hundreds of thousands of business payments daily, representing 10 percent of its international payment volume and more than $100 billion in value each day; nearly 50 percent of payments were credited in less than 30 minutes, and nearly all within 24 hours. SWIFT said that 150 banks around the world have signed up to use the service, and volumes are expected to continue to grow rapidly.
Anyway the main advantage of the SWIFT network is that it is ubiquitous: more than 11,000 financial institutions use the service worldwide in more than 200 countries and territories, making it possible to transfer money to and from practically every country.
Many people wonder what makes Ripple different from a company like PayPal or Stripe in terms of payment processing. While PayPal and Stripe are direct to consumer solutions, Ripple operates more as infrastructure for banks than as a standalone solution. Additionally, the RippleNet doesn’t rely on Ripple the company to continue to function. If PayPal were to shut down, so would their payments. If Ripple shuts down, the RippleNet will continue to exist. Finally, PayPal still relies on older technologies like ACH to process its transactions. Ripple is a payment processing technology itself that directly integrates with banks and other partner gateway institutions, with faster processing times and lower fees than PayPal. Ripple has long been criticized for its centralization. These concerns have revolved around the degree to which Ripple, or its partner exchanges, have the power to freeze and reverse transactions. Ripple’s greatest centralization problem may owe less to the way its nodes operate, however, and more to the amount of coins held by the company. Given that Ripple owns the majority of all XRP, the argument goes, anyone buying the coin is essentially buying shares in the company.
In conclusion, can Ripple replace SWIFT? Or will banks make their own blockchain-based network, but which will be under their control? Ripple promises faster, and more transparent cross border payments from any two points across the world. This looked like a dream to many in financial Institutions who are inherently depended upon SWIFT for all cross border payments, and, it is clear that the 46-year old banking technology giant is taking RIPPLE and the threat of its potential for disruption seriously. In the next couple of years, it will be interesting to see how Ripple proceeds with its partners around the globe to capture the payments market and become the SWIFT 2.0.
