What an Open Network Means for Banks, Market Makers and Regulators

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An open marketplace has expanded both supply and demand for taxi services. Photo: Daniel Horacio Agostini

One unique feature of Ripple is the open nature of the network, which has numerous benefits for banks, market makers, regulators and ultimately consumers.

Given that the idea of an open value network is somewhat of a new paradigm, it’s worth going over just exactly what might mean for the payment ecosystem’s various stakeholders.

The benefit of an open network for banks

Managing information is pivotal for banks. As part of their daily operations, banks need to manage an endless flow of payment data, which also includes customer information. Not only do customers expect and demand this information to be kept private, regulators require it. Moreover, it’s important for banks to maintain confidentiality since transaction information—such as the volume or the currency—is considered competitive intelligence.

Throughout our numerous conversations with banks and financial institutions, a common question was whether or not an open network could facilitate both privacy and confidentiality. At first glance, “open” may seem concerning because banks naturally expect payment networks to be private.

In reality, Ripple satisfies both privacy and confidentiality. While transaction information on the ledger is public, payment information is not. It’s difficult for anyone to associate transaction information with any specific bank.

Finally, there are benefits to transparency, especially for cross-border (out-of-network) payments, which have traditionally been relatively opaque. End-to-end traceability will not only reduce risk and delays, it should also reduce the cost of compliance allowing banks to lower costs of fee-disclosures and regulatory reporting.

The benefit of an open network for market makers

The market for settling payments is huge. The heart of the issue is that it isn’t necessarily accessible. This undermines both efficiency and competition. Meanwhile, market makers already specialize in managing capital and the associated risks. As we’ve discussed previously, what Ripple does is essentially allow market makers to access what is essentially a marketplace for float, where market makers can compete to provide liquidity, which lowers costs for banks and businesses.

One way to understand the impact of expanding accessibility is to look at how Uber affected the marketplace for taxis. In San Francisco, the taxi market was about $140 million per year, according to Uber CEO Travis Kalanick. But Uber is already making three times that with revenues of $500 million per year. This means that competition doesn’t necessarily cannibalize existing revenue, it can help the entire pie grow much larger. In the case of Uber, by expanding the supply of drivers and offering a far better experience, many more customers decided to use taxi services rather than other modes of transportation, expanding the marketplace and eventually spurring on both innovation and competition.

The benefit of an open network for regulators

The role of regulators is to protect the welfare of any payment systems, primarily because payments can be used to finance activity that is deemed detrimental to society—such as crime and terrorism. As a result, being able to track payments is fundamental to regulators doing their job.

With the way things are today, it’s extremely difficult to monitor transaction activity given disparate systems, networks, and platforms plus the continued prevalence of physical cash. As a result, transaction monitoring is a highly manual and operationally intensive process, which means that regulators incur high costs simply to do their job or in some cases, they aren’t able to do their job as effectively as they would like.

For regulators, the open nature of Ripple provides further transparency and payment traceability, thereby reducing their costs while allowing them to do their jobs more effectively. If regulators and banks are able to automate compliance processes with Ripple, it reduces costs for everyone in the ecosystem.

In the end, however, the real winners are consumers, who benefit from a safer, more open, and competitive ecosystem that provides a platform for innovation, better access, and lower costs.

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