2023 New Value Report

Banks Turn Remittance Obstacles into Opportunities with Ripple

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Over the last ten years, changes wrought from the 2008 financial crisis along with a marked increase in fraud and terrorism funding concerns, have consolidated the world’s system of correspondent banking. Despite positive macro-economic trends and an increasingly interconnected commerce sector, de-risking efforts at large financial institutions have shrunk the world’s correspondent banking relationships by as much as 25% according to research by Accuity.

The result is a growing pool of regional banks that struggle to affordably and securely serve the international transactions needs of their customers. This increase in regional banks is leaving large segments of the world’s population excluded from mainstream financial systems.

Eroding market share for regional banks

This disconnect in correspondent banking has driven up the cost of remittances in smaller, riskier regions, even while overall remittance prices have fallen in larger developed countries. For regional banks, this impacts their ability to serve customer needs and ultimately diminishes their financial performance.

This is because consumers will not simply walk away from international transactions. Immigrants or refugees must get money to their families, expatriates need to manage finances in multiples countries.

So as in any natural ecosystem, when these consumers encounter one barrier they move towards another opportunity. With bank-based remittance prices too high or simply unavailable in these regions, customers are turning to money transfer operators (MTOs) like Western Union or MoneyGram.

MTOs are better able to serve customers because remittances are a core product — rather than a cost center like at smaller banks — allowing them to be more creative in its delivery. Customers turning to MTOs means significant erosion of market share for banks.

To counter this trend, regional banks are becoming increasingly creative in building remittance and money transfer corridors. By creating long chains of partner banks across countries, they can link currencies through multiple “hops.”

Unfortunately, these hops introduce additional risk — especially as some bank or currency partners operate in less than transparent ways — and add layers of extra cost in partner and FX fees. And the more remote the remittance corridor, the murkier and more cost prohibitive the transaction for the consumer.

Enter RippleNet and xCurrent

So what’s a regional bank to do? They need to overcome two barriers: the risk inherent to a multiple-hop corridor and finding banking partners to create new corridors.

xCurrent and RippleNet solve both issues. First, xCurrent provides groundbreaking speed that enables regional banks to send and settle money instantly, and with new end-to-end messaging tied to settlement, it also creates a new level of transparency.

RippleNet solves the second piece of the puzzle for regional banks. The decentralized network of banks across the world is over 100 strong. Next week in Dubai, members of the network will meet to forge new connections and discuss how they use Ripple technology — sharing lessons learned and best practices.

For regional banks, events like these provide a critical opportunity to create relationships that open new remittance corridors. Together with new technology, these relationships level the playing field for regional banks — they can now  overcome both the cost and risk associated with the traditional correspondent banking model and better service their customers’ needs.

For more on the xCurrent and our other solutions, visit our website.

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