Pittsburgh-based PNC Bank has entered the real-time, cross-border payments arena by joining RippleNet.
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According to Reuters, PNC’s treasury management division will be accepting cross-border transactions using Ripple’s blockchain-based system xCurrent. PNC has already concluded a successful pilot phase and will immediately begin using the service for inbound transactions.
Asheesh Birla, senior vice president with Ripple, told CoinDesk that small U.S. businesses would benefit substantially from using xCurrent and claimed that the bank already has some clients lined up. “Providing instant payments instead of waiting two to three days, that sounds like a short time, [but] that’s two to three days without access to capital. Having that is a real game-changer,” he said.
Over the past several years, banks all over the world have invested billions in blockchain and distributed ledger technology (DLT). However, few products have actually surfaced in that time.
But now with a top-tier bank like PNC going live with xCurrent, it is possible that others could follow suit. It also could be a game changer for Ripple.
The knock on Ripple so far is that it hasn’t achieved mass adoption by banks. In the latest AFP Payments Guide, Ryan Gaylor, director of corporate payments at Ripple and an AFP 2018 speaker, noted that while his company has over 100 financial institutions on its network, achieving ubiquity means roping in tens of thousands of banks. And with SWIFT having a goal of migrating its entire community onto its global payments innovation (gpi) service by the end of 2020, Ripple faces some stiff competition.
Until now, the majority of top tier banks currently using Ripple are based outside of the United States (MUFG, RBS, Santander, Standard Chartered). But again, having a top 10 U.S. bank like PNC on board has major implications. If enough of PNC’s corporate clients begin using RippleNet for payments, its U.S. contemporaries could take notice.
“This shows how new technology is challenging legacy structures,” said Magnus Carlsson, AFP’s manager of treasury and payments. “The days of slow payments are certainly coming to an end. New technology is facilitating great improvements in the payments industry and forces all participants to follow suit,” Carlsson said.
xCurrent vs. correspondent banking
Ripple’s service sounds like an ideal solution for corporate payments, because it streamlines the process of managing and settlement. As Gaylor explained, the current correspondent banking model is so slow that it is nearly the equivalent of hand-delivering a payment to the intended recipient. Ripple, in contrast, boasts transactions that happen in seconds.
The backbone of Ripple’s product suite, xCurrent utilizes elements of blockchain, supporting transactions between independent ledgers without a central clearing party through an Interledger Protocol (ILP). ILP is an open source technology that creates a way for two different ledgers to have a standard for connecting and creating settlement. This solves a common problem frequently cited by blockchain critics—if distributed ledgers can’t connect to one another, how can they transfer value?
“When you really look at other payment networks out there—that’s where we really go beyond messaging,” Gaylor said. “There’s a messaging component in xCurrent, but the settlement is the differentiator because when you have two banks in a simple transaction that are initiating a payment, they move that payment one leg at a time. So Bank A says, ‘Here’s what I’m charging my customer,’ and sends the file on. And what you have on standard SWIFT today is an acknowledgment that says, ‘I received the file.’”
In contrast, Ripple creates a process where all the parties in the transaction get an immediate view into what the fees are, the AML/KYC compliance, etc. When it moves to settlement, the ILP ensures that all parties make the transactions. It also incorporates cryptography to allow all parties to validate that the transaction is as expected as it was indicated on the messaging side.
“On a traditional payment rail, the reason why there is such a relatively high failure rate in cross-border payments is because the transaction is settled each leg at a time,” Gaylor said. “And what can happen is, it can go from the originating bank to the correspondent bank who gets it out of the country to the beneficiary bank, and the beneficiary bank can say, ‘I've got a different address for this company. Reject it.’ And it gets lost in the abyss.”
Added Gaylor: “So when you go back to the corporate dynamics of the impact—let’s say corporates have their payments down to one or two days. But they can’t count on one or two days. They have to account for that worst case scenario. So if they have payments that have taken five days because of discrepancies like that, then that’s what they have to account for.”
Download the AFP Payments Guide, The Advent of New Cross-Border Payments Systems, underwritten by MUFG Union Bank, here.