The Center for Data Innovation spoke with Amir Sarhanghi, vice president of product at Ripple, a funds transfer company based in San Francisco. Sarhanghi discussed the benefits of blockchain solutions for cross-border payments and the evolution of the blockchain environment.
Eline Chivot: How do blockchain-powered payment solutions fit in the financial industry? What is their role in transforming financial services, and what are the demands they address?
Amir Sarhangi: Blockchain-based technology has the power to revolutionize the financial industry and vastly improve the way payments are transmitted across borders. Today, the fastest way to send money internationally is to bring €1,000 on a plane with you because cross-border payments are slow, expensive, uncertain, and often fail. The need for on-demand, real-time, low-cost payments touches every corner of the globe, yet no truly global payments network exists. As we have seen at Ripple, implementing blockchain technology lowers both costs and transfer times for their customers, which is especially crucial in developing countries where financial flexibility is limited. Through the use of blockchain and modern APIs, Ripple allows financial institutions who are part of our network—RippleNet—to send money globally, instantly, reliably, and for fractions of a penny. Customers can immediately communicate information about a payment between each other in real-time, and settle the payment instantly. The current system, which uses SWIFT and the correspondent banking network, fails 4 percent of the time and the payments that do go through can take anywhere from two to three days.
Chivot: It seems that Ripple is both a platform (RippleNet) and a currency (XRP), used to bridge payments from one currency to another. Can you clarify the difference and explain how they work?
Sarhangi: That isn’t actually correct, but I’m glad you brought it up. Ripple is a software company that provides solutions based on blockchain technology to send money globally. RippleNet refers to the global network of financial institutions that connect through Ripple’s suite of product offerings that solve key issues related to payments. First, messaging and settlement: RippleNet offers a solution that enables banks to instantly settle cross-border payments with end-to-end tracking. Second, liquidity management: RippleNet offers on-demand liquidity for cross-border payments by using the digital asset XRP in the cross-border transaction process. This means that financial institutions don’t have to pre-fund accounts in a bunch of different currencies all over the world.
XRP, on the other hand, refers to the independent digital asset. You can think of XRP as a better bitcoin, which is what the creators of it intended. It’s faster than bitcoin and significantly more efficient in its use of energy, unlike bitcoin. It is open-source and decentralized. As of today, Ripple only operates 7 percent of the total validators on the XRP ledger. That means that Ripple cannot control who builds on the XRP ledger, lists XRP, or governs XRP transactions.
Chivot: Could you tell us about a recent use case that has shown the tangible utility of your platform for cross-border payments, both for a payment provider and for individuals?
Sarhangi: Financial institutions using xRapid—our product that uses XRP—see an average 40 to 70 percent cost savings compared to what they normally pay expensive foreign exchange providers. The average xRapid payment takes just over two minutes, compared to today’s average of two to three days when sending cross-border payment. One of our xRapid customers, Mercury FX, recently sent through a £3,521.67 payment—the type of low-value, high-volume payments that work best on xRapid—on behalf of UK-based food distributor Mustard Foods. They saved £79.17 and 31 hours on just that transaction alone. Not only does this benefits the end user, but it also gives Mercury FX the chance to differentiate itself amongst competitors and provides better capital efficiency by not having to prefund a Peso account in Mexico. Even those who do not yet use XRP are still achieving tremendous savings by being a part of RippleNet. This past November, Brazilian remittance provider BeeTech was able to drop its fees from $20 to $2 because of eliminated SWIFT expenses for some corridors. Ultimately, these lower costs can be transferred to customers, marking the start of RippleNet’s mission of reducing the friction within the $642 billion global remittances market.
Chivot: Can you tell us what are some of the limitations and the dilemmas facing the payments industry when it comes to using blockchain? And what needs to be done to make this technology work at scale, and to use it to address large business problems?
Sarhangi: Global payments today operate on an antiquated, entrenched system where payments are transferred from one financial institution to the next, and at each handoff, there is risk of delay, failure, miscommunication, and higher costs. As a result, cross-border payments are slow, opaque, and unreliable. By incorporating blockchain technology and leveraging digital assets such as XRP into payment solutions, we can address these issues facing the payments industry. While blockchain has a strong use case for solving the cross-border payments problem, regulatory uncertainty has caused a barrier when it comes to adoption. Regulators are interested in this new technology and see the potential for an improved payments experience, but they understand the need to balance innovation with safety. They must ensure companies have identified risks, put in place the proper mitigants, and tested solutions for security and resilience before fully accepting new technology. Because regulators are exploring how to best protect consumers while encouraging responsible innovation, there is uncertainty when it comes to blockchain solutions. In order for blockchain and digital assets to realize their potential, it’s critical we in the industry work with policymakers, not in the shadows. Coupled with the regulatory and technical complexity of updating it with brand new technology, the fact that the global payments infrastructure hasn’t changed in decades means that institutional adoption and commercial usage of our products will take time. However, we’re encouraged and impressed by how fast our customers are moving—and they’re only getting faster.
Chivot: Many prototypes have been built but blockchain is struggling to emerge from that stage. Which businesses do you see are more fit for this technology to further evolve?
Sarhangi: Over the past few years there has been increased interest in this space and as a result, we’ve seen many blockchain projects emerge rapidly. A lot of these companies or projects are struggling because they aren’t focused on solving real problems and only companies with strong use cases will be able to survive and grow. Once the hype subsided last year, it was clear that you didn’t need a blockchain for things like flower freshness or Kodakcoin. That’s why Ripple has focused on a clear use case for blockchain and digital assets, cross-border payments, in an industry we can fix immediately, and we are working with financial institutions to do just that.