The tools of the past cannot adapt to the tasks of tomorrow. Image: Shutterstock
No question, the world of payments is evolving – especially for cross-border payments. But what will it take to meet the global transaction demands of the future?
SWIFT announced its Global Payments Innovation Initiative (GPII) to enhance cross-border transactions by leveraging their current messaging platform and applying a new service level agreement (SLA) rulebook.
We believe the future requires more than an SLA update. Global payments need fundamental change and a system designed with the scalability, flexibility, efficiency, security and redundancy of the Internet. Why?
Cross-border payments make up $22.5 trillion annually and are increasing at a rate almost three times faster than the global GDP. However, current payment rails aren’t equipped to rise to these key challenges:
- The inability to support real-time settlement for transfers in any amount
- The lack of transparency in costs or payment status and settlement risk
Global payments can currently take 3-5 days to process. It’s a lengthy process because the payment hops between intermediaries, each sending messages containing payment and balance information at the start or end of their business day. This is the best-case scenario, where banks have correspondent relationships and available liquidity. Sending money to somewhere more remote, or to a place where correspondent banks do not have direct access, can take a week or more.
GPII boasts settlement within a single day. Same-day is an improvement, but we don’t believe it will keep up with consumers’ and businesses’ expectations for on-demand payments.
Today, tech corporates disburse low-value payments in high volumes to hundreds of countries, like Amazon to third-party merchants or Uber to drivers. Their suppliers and customers are accustomed to service on-demand and payment in real-time.
The Internet of Things (IoT) is still in its infancy, but could potentially add billions of connected devices to the world economy as soon as 2020. By reducing friction from everyday interactions, IoT will automate payments to a point where people and businesses will transact in the background in real time. Connected devices will demand real-time settlement of trillions of micropayments. However, the current infrastructure cannot support this level of growth — it already is fraying at the edges with today’s transaction volumes.
SWIFT’s GPII does not address the antiquated infrastructure that makes real-time settlement a constant challenge. GPII does not change the underlying infrastructure at all, it merely makes a minor adjustment to its current settlement requirements.
Ripple’s distributed financial technology modernizes global infrastructure, so funds settle in real time. Leading banks around the world are using Ripple to process real time payments today.
Stay tuned to Ripple Insights for part two of this story on fee transparency, payment tracking and settlement risk.