Monday, 15 October 2018

Goldman, JPMorgan and Ripple Fight About International Payments

Here's the old analogy about the correspondent banking system. Let's say you want to fly from Chicago to Hong Kong.
Well, to save on costs, you might take a local flight from Chicago to New York, then from New York to London, and then from London to Hong Kong. Or maybe the Travelocity algorithm will route you to Dubai for the optimized fare, who knows. And so it is with international payments -- an American business might try to pay its Chinese supplier, and the bulky enterprise payment will hop between various accounts in correspondent banks across countries, trailing instructions as to where to park this money. Cross-border payments volume is about 15% of total payments in the world, and within that 90% is business to business, representing about $300 billion in revenue.

The above system is clunky and slow. It's also expensive. Think about what Transferwise has done for consumer remittances, crushing bank revenue of 3% for FX spreads and 3% for convenience fees into 0.35% + $0.80 per transfer. Now if such cost savings could be applied across international payments, businesses would have a lot more to put back into their pockets. Anyway, all this is context. The three news items in this theme are (1) Ripple talking about how its xCurrent 120 bank payments blockchain may involve the cryptocurrency XRP, (2) Google and Goldman investing $25 million in Veem, which uses Bitcoin to replace correspondents, and (3) JPMorgan going public with the Interbank Information Network to 75 banks, including Santander and Societe Generale.

It's odd that all three of these items came up essentially within a week. The approach is different, but the target is the same. Ripple's game is to leverage its proprietary currency as the accounting unit, and thereby also inflate the market cap of this digital assets. It seems unlikely that banks would endow a third party's coin with such value (rather than say the utility settlement coin), but anything is possible. Veem has grown very quickly in just three years to 80,000 customers by focusing on small business, and its CEO had previously sold a business to Western Union. And the JPMorgan effort is expecting to see 15,000 payments a day in the new network -- though the company had previously had trouble getting the rest of the industry to adopt its Quorum solution. All that said, there's $300 billion up for grabs.

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