Why we need a common standard for moving e-money

Wire-Transfer

By Chris Larsen


From the barter system to gold coins to paper checks, improvements in the tools and technologies that facilitate payments have had an immense impact on society throughout history. After all, the movement of money is the fuel that powers the global economy.

But in the past few decades, progress has seemingly ground to a halt. While the internet has helped transform nearly every other industry from shopping to journalism, the core infrastructure that enables the global transfer of value has remained relatively unchanged since the 1970s.

In an age when everything is in real time and on demand, payments can still take days, where an international transaction can easily take longer than sending a package. It’s not just about speed but also cost. It doesn’t make economic sense to send $100 from the US to Europe because of high fees.

The reason for this is how the world’s payment systems are set up. Each country has its own national system, but different systems can’t connect to one another. In a way, the situation parallels the early days of email. Early services like GEnie and AOL didn’t initially talk to each other. This meant that you weren’t able to email your friends if they were on different networks.

Payment networks are similarly incompatible. Today, you can’t send money directly from one country to another. Instead, we rely on a system called correspondent banking in which large international banks with accounts across multiple networks conduct cross-border transfers. The system works, but it’s hardly efficient.

In the case of email, service providers eventually developed an open internet protocol called Simple Mail Transfer Protocol or SMTP. An open internet protocol is a universal language that allows different systems to communicate with each other. Once widely adopted, service providers around the world became connected to each other through this common standard.

A similar evolution is beginning to take shape in the world of payments. Until recently, the technology simply didn’t exist but emerging innovations such as distributed ledgers now make that reality possible. Previously, it was impossible to transmit value without a middleman to verify a transaction – unless you were handing someone cash. A distributed ledger is basically a shared database that allows institutions to directly send and receive money in a trustworthy fashion without a middleman. As a result, we have the capacity to connect the world’s payment systems for the first time.

That’s a big deal. The ability to transfer value anywhere in the world instantaneously for minimal cost will have a profound economic impact on just about everyone, from the migrant worker sending money back home to his family to the multinational corporation required to set aside billions of dollars at a time to pay its expanding international network of suppliers.

Over time, our payment systems will begin to resemble the internet, enabling money to move as freely as information does today. In a sense, what we are seeing is the rise of the internet of value. How does the internet of value play out? It’s impossible to know for sure, but parallels with the birth of the internet provide numerous clues. Any network, information or other, requires a preliminary framework. With the early internet, the fundamental infrastructure was bootstrapped by academia and the government. When it comes to the internet of value, we believe the foundational groundwork will laid by financial institutions and enterprises, which custody assets and already move trillions of dollars daily.

Governments, central banks and financial institutions have already begun this process in earnest. Countries around the world from Finland to Australia to the US are working toward upgrading their antiquated payment systems. In the US, the Federal Reserve has created a Faster Payments Task Force to identify opportunities to upgrade US payments while in Europe, the European Central Bank has issued a challenge to the banking industry to develop a cohesive vision for building payments infrastructure for the future.

These efforts coincide with a steady stream of reports coming from the likes of the World Economic Forum, McKinsey and Santander Bank, just a smattering of recent research that emphasizes the need to evaluate and evolve global payments infrastructure. Traditionally, conservative and risk-averse banks have taken the hint, including Deutsche Bank, Barclays, and UBS, which have launched innovation labs to experiment with new technologies. Indeed countless banks around the world are already testing distributed ledger systems in proof-of-concept trials.

In that sense, the internet of value is already here. We have the means and we certainly have the will. And just as the internet of information provided broad access to knowledge and services to an increasing number of world citizens, this blossoming transformation in how we move money will help connect the 2.5 billion people who still don’t have access to the traditional economy while serving as a platform for new business models and untold innovation.

 

Ripple well-placed for global adoption

Ripple, a new payments system that has grown out of Bitcoin, could become a new standard for international payments.
An IDC Financial Insights study builds on recent IDC analysis of the Bitcoin ecosystem by considering the potential of Ripple, an offshoot of Bitcoin which purports to be an open source, realtime payment settlement infrastructure, and the impact it could have on the financial services industry.
Crucially, Ripple concentrates on providing a payments infrastructure, rather than a new currency, in its attempt to overhaul the international payments landscape.
IDC expects payments through Ripple or similar protocols to grow exponentially in the years ahead. As such protocols supersede Bitcoin, the distinction between cryptocurrencies and new payment protocols will become clearer, and the banking industry will embrace the protocols. With the support of Ripple Labs and other interested parties, Ripple is currently best placed to take this market share.
In the short term, more parties will undergo pilot and proof-of-concept projects, and domestic banks are likely to partner with counterparts overseas for this purpose. There will be an initial opportunity for banks or companies like Earthport to charge clients for the ability to make instant global payments, especially as IDC expects initially that Ripple will be adopted not as an industrywide solution like UK Faster Payments but by innovative banks.
However, the fact that the US Federal Reserve is prepared to countenance a new payment network based on the principles of a distributed ledger shows the strength of the idea. The innate advantages of speed, reliability, and transparency of protocols such as Ripple will see them win out over conventional payment networks.
International payments are increasingly out of step with the customer experience that consumers and businesses expect in their modern dealings, and a payment network based on distributed ledgers, such as Ripple, is a 21st century solution to this problem.
“Existing players could enhance their offerings and make them more efficient by incorporating Ripple payments, and before the technology is ubiquitous there is also the opportunity to charge customers for it. It can be expected that once there is any kind of critical mass, saturation will follow rapidly,” says Lawrence Freeborn, senior research analyst at IDC Financial Insights.
“Global transaction processing infrastructure needs to evolve quickly to support growing demand for real-time payments,” says Andrei Charniauski, head of Europe at IDC Financial Insights. “History tells us that the payments industry requires standards and leadership to evolve — and Ripple can offer both to lay foundations for the next-generation approach to payments. The business case is clear, so early adopters can already start offering new competitive payments products to their clients.”

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