The True Cost of Moving Money


Multinational corporations drive payment flows. Photo: Toyota

At this point, there’s an agreed upon consensus that the core infrastructure by which we move money around the world needs a serious upgrade.

We know this because countries from the U.S. to Australia are investigating how to upgrade their systems while entire regions, like emerging Asia-Pacific—which is set to rival Western Europe in terms of international trade by 2023—are looking into novel ways to solve that pesky problem known as cross-border payments.

But while we generally think about the cost of moving money in terms of fees and foreign currency spreads, the true cost is far greater, hidden beneath the surface.

The true cost of doing business

A good way to understand the true cost of funds settlement is to look at those responsible for most transactions globally—multinational corporations, which make up 90 percent of payment flows around the world, according to BCG’s 2014 Global Payments Report.

There’s a reason why corporate treasury departments have become so sophisticated in recent decades—out of sheer necessity. Meanwhile servicing such customers is becoming ever bigger business. The same BCG report expects wholesale transaction banking revenue growth to outpace retail over the next 10 years in every market.

In a way, the size and sophistication of this expanding ecosystem is directly correlated to not only the demand for payments but also the cost of making those payments efficiently using the existing banking system.

For multinationals, fees and FX rates are just a blip—and they likely get sweetheart deals given the kind and size of business they bring. Instead, what’s missing is a marketplace for funds settlement. It’s here that corporations accrue much of their cost of doing business and it’s what their corporate treasury departments are tasked with navigating.

In corporate treasury parlance, this is known as the cost of working capital, which, in this case, is essentially the opportunity cost associated with setting cash aside to fund payments. Companies like Apple and Samsung are required to tie up billions of dollars every month in non-interest bearing accounts for various timeframes, usually to pay their suppliers, employees, and local taxes. Your typical multinational could have hundreds of local currency bank accounts around the world to facilitate their ongoing operations.

A marketplace for funds settlement

That’s where Ripple comes in—by facilitating not only real-time settlement but also a marketplace for funds settlement where market makers compete as liquidity providers.

For one, settling in real-time produces an immediate benefit regarding working capital. It’s common for corporates to pay their suppliers on credit either in 30 or 60 days, in some cases—costs which are implicitly priced into the goods they require. If a corporate can now make payments sooner and at a lower cost, they are in a good position to negotiate for better prices.

Moreover, even as corporate treasury departments have become increasingly sophisticated, it doesn’t make them experts in international funds liquidity. That’s like expecting Target or Home Depot to be experts in cybersecurity. It’s both unfair and illogical.

With Ripple, market makers—specialists in international funds settlement liquidity—bear the burden of providing optimal efficiency. In other words, let the specialists specialize.

By providing a marketplace for settlement, Ripple allows market makers to compete in order to provide banks and their corporate customers liquidity. This way, companies can focus on what they do best—build great products while selling them at better prices.

Making capital work

These benefits aren’t abstract. As this week’s Santander Fintech 2.0 report pointed out, banks could save as much as $20 billion annually from the efficiencies born from distributed ledgers. For corporates—any bank’s biggest customer—the potential savings are many multiples greater.

This vision exists in stark contrast to what we have today—where banks and their corporate customers are forced to optimize working capital on an ad hoc basis in a fashion that’s far from transparent, given the realities of correspondent banking, where trillions of dollars sit idly each day.

With an open marketplace for funds settlement, that obligation is not only outsourced, it allows money to transport—in real-time—where it can produce the greatest return. For banks, for corporates, and for market makers, everyone wins. Ultimately, that means consumers win, too.

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