SWIFT is enhancing its network following consultations with banks and in response to blockchain-based payments platform Ripple. Robin Arnfield reports.
Elizabeth McQuerry, who heads Glenbrook Partner’s Global Payments Practice, said in a blog that “two very different (cross-border payment) models are growing into viable, global options characterised by a lack of interoperability.
Go deeper with GlobalData
“SWIFT gpi (global payments innovation) is taking shape as the next generation of traditional correspondent banking, implementing enhancements to make the sector more competitive through payment tracking, greater transparency, and same-day value delivery within the network of users.”
“RippleNet, a distributed ledger network for the exchange of cross-border payments, is beginning to gain traction as the alternative to the traditional model,” McQuerry says.
Ripple
RippleNet is an inter-bank platform that uses bi-directional messaging for communications between participating banks, which currently number 100 FIs including Santander and SEB.
How well do you really know your competitors?
Access the most comprehensive Company Profiles on the market, powered by GlobalData. Save hours of research. Gain competitive edge.
Thank you!
Your download email will arrive shortly
Not ready to buy yet? Download a free sample
We are confident about the unique quality of our Company Profiles. However, we want you to make the most beneficial decision for your business, so we offer a free sample that you can download by submitting the below form
By GlobalDataIn November 2017, American Express joined RippleNet, working with Santander as its partner to enable B2B transfers to Santander UK bank accounts.
In addition to RippleNet, Ripple offers the XRP digital currency, which it defines as a native digital asset not tied to the value of any fiat currency.
Common goal
“Ripple and SWIFT share a common goal: helping banks move money/value/payments around the world,” a Ripple spokesperson says. “However, while SWIFT depends on a correspondent banking system to process payments, Ripple is enabling frictionless, instant payments today using its enterprise blockchain technology and the XRP digital asset.
“Ripple’s solution includes two-way messaging, instant settlement, and end-to-end visibility over the journey and fees of the payment. In addition, Ripple has a unique product suite, including xRapid, which helps RippleNet members source on-demand liquidity for cross-border payments using XRP.”
Ripple says that it is compatible with all emerging standards and is the only simple, lightweight protocol for payments that can be used by banks, payment providers and other FIs.
“Ripple-enabled payments are settled in a matter of seconds and fees are around $0.0004/transaction. The solution allows banks to exchange information in advance, including associated costs related to transaction fees and/or foreign-exchange rates, as well as the expected date of delivery for the funds.
Unlike the legacy (SWIFT) system, if any information is incorrect or missing – causing a payment to fail – both banks are notified immediately.
“This prevents payments from getting ‘stuck’, or becoming lost. Once the sending bank has initiated a transaction, Ripple uses Interledger Protocol (ILP) to settle the funds and notify everyone of its successful settlement.”
Indicative of the challenge Ripple poses to SWIFT, Ripple held a parallel event to coincide with SWIFT’s Sibos conference in Toronto in October 2017.
Responses
In reply to Ripple’s claims that SWIFT’s correspondent banking model isn’t as efficient as RippleNet, a source close to SWIFT says that “SWIFT’s correspondent banking model is used by thousands of institutions globally.
SWIFT is community-driven and is responding to changing market requirements with the launch of gpi and other services. The reality is that many FIs, particularly those in less-developed or less-regulated regions, rely heavily on SWIFT’s services. While different models offer choice, that is unlikely to change anytime soon.”
In response to Ripple’s claim that Ripple offers instant settlement, whereas SWIFT payments can be expensive and slow, the SWIFT source said: “There’s definitely room for improvement in the payment process for all infrastructure providers. Speed of settlement is important, but for many corporate treasurers, end-to-end real-time tracking of payments is the number one priority over speed.”
Commenting on Ripple versus SWIFT, Sean Rodriguez, Executive VP at the Federal Reserve Bank of Chicago, said: “The Fed has chosen not to endorse any particular platform, system, or technology. My own personal feeling is that the more competition there is in domestic and cross-border payments the better for the market and for businesses and consumers everywhere. I expect the best technologies will thrive in the new improved payments environment.”
SWIFT gpi
“18 months ago, SWIFT gathered a group of global transaction banks to look at the pain points associated with the correspondent banking process,” Harry Newman, SWIFT’s Head of Banking, says. “Although correspondent banking has been around a long time, the version of correspondent banking used today is a child of the 1980s – it did a good job, but has its issues.
“The current approach isn’t transparent, and no-one knows how long payments take. From the end-user viewpoint, you don’t see what happens to your payment. But the bank-to-bank experience for an international payment doesn’t matter as much as the end-user experience. With new technology, new expectations, and the digital age, this isn’t acceptable, so we set out to address these issues, and worked with the banks to co-create SWIFT gpi.”
Newman says 25 banks are now using SWIFT gpi , and 40 are expected to be live by the end of 2017. In addition, around 80 banks are in the implementation phase for gpi. Over the next two to three years, SWIFT plans to progressively offer gpi to the whole SWIFT community.
Current rails
“Re-engineering all the current rails that carry the world’s trade payments from scratch is a multi-year job,” says Newman. “But these existing rails work, so we used them to put in place the gpi service. Our view is that the underlying rails aren’t broken, so there’s no need to re-engineer the foundation when we can instead apply new technology to address the underlying issues.”
New technology offered in SWIFT gpi includes a cloud-based tracker service that uses APIs to monitor the process of all payments. “Now corporates can track their payments in real-time and get confirmation of that credit directly from their banks,” says Newman. “
SWIFT gpi also has a strong service level between the banks involved so that, not only are gpi payments tracked and monitored, but they move faster as they have to be processed within a certain timeframe.
“Since gpi went live earlier in 2017, several million gpi payments have crossed over 100 country corridors. We’re seeing banks such as Citi use APIs to embed gpi Tracker information into their corporate payment platforms, allowing their customers to track gpi payments in real-time. The industry feedback about gpi is very positive.
With gpi, payments are credited within 24 hours from initiation and most within a few hours or even minutes. “This is an important distinction,” says Newman. “People say correspondent banking is slow, but what we’re seeing is that gpi is fast. Tech vendors talk about speed, but they mean bank-to-bank transaction speed. What matters is when people actually get paid, which is a core focus of SWIFT gpi.”
Distributed ledger
“We’re interested in distributed ledger technology (DLT), and are currently in the exploratory stage with several proofs of concept, including the use of DLT for Nostro/Vostro account reconciliation,” says Newman.
SWIFT is working with 33 banks which are gpi users, on its Nostro/Vostro account DLT project. “Vostro and Nostro accounts are distributed so they lend themselves to DLT,” Newman says.
In an October 2017 statement, SWIFT said: “The PoC’s preliminary results show that the SWIFT-developed DLT application can deliver the business functionalities and data richness required to support real-time liquidity monitoring and reconciliation. DLT provides real-time visibility to both the account owner and its servicer on the available and forecasted liquidity on the Nostro account and supports payment reconciliation and investigations by providing an enriched data model based on ISO 20022.”
“It’s not all about DLT, as technologies such as the cloud and APIs have roles to play,” says Newman. “We use the cloud for the gpi tracking service and the banks use our APIs to integrate the status of payments, the information about the end-to-end payment flow, and the final confirmation into their offerings to their clients. Some of the major banks such as Citi have already started to do this. From our viewpoint, DLT is a technology, so, if it works, we will use it.
“There’s no sense in taking a perfectly good centralised ledger and making it distributed, if it works well on a centralised basis. But some important processes like accounts are naturally distributed and need to be reconciled, so it makes sense to put these distributed accounts onto a blockchain.”
Innovation
“gpi doesn’t use non-central bank cryptocurrencies but uses fiat currencies that banks hold with each other – that is the underlying money mechanism that banks use for corporate and for retail payments,” Newman says.
“The innovation with gpi is in its cloud-based service that gives complete transparency and end-to-end tracking, combined with the speed and predictability that clients want. We think that the transparency on fees, charges and payments status offered by SWIFT gpi is a major part of today’s compliance requirements.
“We’re collaborating with Fintechs that specialise in DLT. We know we can’t do everything and can’t imagine all the possible use cases for DLT.”
Newman says SWIFT gpi is a flexible platform with the potential for Fintech providers to offer additional services that sit on top of gpi. “We allow others to come into our ecosystem with APIs to provide innovative services, and this could include DLT,” he says. “The technology is secondary to the business problem we are trying to fix.”
R3
US-based R3, which has over 100 members including commercial and central banks, other financial institutions, regulators, and trade associations, has developed the Corda financial services distributed ledger platform. R3 has over 60 partners including consultancies, systems integrators, and software vendors building apps on top of Corda.
R3 has offices in nine countries, and so far has raised $107m. The company, whose backers comprise 43 banks plus Intel, is raising additional funds from its investors.
“We started R3 in September 2015 with the goal not of disrupting the banking industry but of building a set of DLTs to empower our bank members to do their jobs more efficiently,” says Charley Cooper, R3’s Managing Director and Head of External Affairs. “Our Corda platform isn’t a disruptive technology but a means of empowering the next generation of banking and broader business services.
“SWIFT is a critical component in the infrastructure underpinning financial markets. We’re in exploratory discussions with SWIFT about how DLT could be deployed to improve efficiencies for market participants.
“Several companies are looking to DLT to disrupt and destroy the current model of financial services. Bitcoin was invented to turn the banking system on its head and make commercial and central banks irrelevant by using peer-to-peer networks to obviate the need for banks – we aren’t doing that. We’re working with partners like the DTCC (Depository Trust & Clearing Corp.), Accenture, Calypso, and our bank members to build a set of software solutions that works within that banking system rather than tear it down.”
Corda
R3’s Corda blockchain framework uses either cryptocurrencies or fiat currencies. “We don’t have a native cryptocurrency,” Cooper says. “We’re working with several central banks around the world to determine the best way to represent fiat currencies on a distributed ledger. We built Corda with a smart contract methodology that lets us code business logic and business transactions. We think that using Corda to transfer fiat currency issued by nation states is the best approach, which is one of the reasons we’re working so extensively with central banks and regulators.
“Corda is built flexibly so that, if the time comes in the future when cryptocurrencies do catch on in mainstream banking, our platform can handle this. One of our partners is the Bank of Canada, which is working with us, Payments Canada, which operates Canada’s core payment systems, and the largest Canadian banks on Project Jasper.
This initiative began in summer 2016 and is now moving into its third phase. For Project Jasper, we created CAD-coin, an instance of the Canadian dollar, with Payments Canada, the Bank of Canada, and the Canadian banks for the purpose of testing the issuance of digital Canadian dollars and using them for payments.
“In the first half of 2018, several of our projects will go into live commercial production on Wall Street. For example, LenderComm, a syndicated loans application built with Finastra, will be live, and we’re working with TradeIX and Accenture in the trade finance space.”
Corporations can use Corda as well as commercial banks. “We built Corda with our bank partners and had a set of product requirements built into the platform,” Cooper says.
“As banking is so complex and regulated, we built a robust platform that is fit for purpose much more broadly across commerce – a corporate treasurer or the financing arm of a car manufacturer could be using Corda just like banks, asset managers or insurance firms use Corda. We think that DLT/blockchain has power to transform commerce broadly just as the Internet did for media and entertainment.
“We’re at the point now where global regulators and central banks are experimenting and looking to build applications with DLT. If governments are involved, there will be a lot of momentum behind DLT.”
IBM
“Traditionally, cross-border payments involve vast ecosystems of intermediary parties between sending and receiving FIs to initiate, clear, and settle transactions involving different currencies,” says Jesse Lund, IBM’s Vice President, Global Blockchain Market Development.
“The process can take days and is subject to errors and high fees from manual processing and reconciliation. Blockchain technology and the digital currencies that it supports, enable direct payment flow between two counterparties in any currency participating in the network, while maintaining security and regulatory compliance with data privacy and governance standards.”
“IBM is working with KlickEx and the Stellar Foundation to deploy a production cross-border blockchain payment solution allowing real-time clearing and settlement on a single network. Built on the IBM Blockchain platform leveraging Hyperledger Fabric and Stellar, the payments solution is already enabling more efficient and inexpensive cross-border transaction settlement across 12 currency corridors.
“The system is initially reliant on the crypto-asset Lumens (XLM) for settlement, but IBM is pursuing alternative settlement assets including central bank-issued digital currencies and tokenised commodities such as gold and other precious metals.”
