Ripple Targets Correspondent Banks in Southeast Asia

Real-time gross settlement system, currency exchange, and remittance network provider Ripple sees growth opportunities in Southeast Asia, driven mainly by the challenges in correspondent banking processes within the region. 

Marcus Treacher, senior vice president of customer success at Ripple, believes cross-border payments today are “broken” as banks are still using “archaic” correspondent banking systems that result in transactions that are slow, unreliable and expensive. 

“Currently, to make a cross-border payment through Swift, a transaction will take one to five business days, with no certainty of settlement and transactions fees that are often more expensive,” he says, speaking to WatersTechnology at the Sibos conference in Sydney.

Treacher adds that particularly in Southeast Asia, correspondent bank networks have not kept up with the pace of economic growth in the region, and their inefficient flows delay and impede regional flows. 

“This means a bank’s customers—for example, SMEs and remitters—must pay high fees and high exchange rates and incur long processing times,” he says.
 
Using Ripple’s blockchain solution, institutions are able to communicate information about a payment between each other in real-time, and settle the payment instantly, without failures, and with lower transaction fees.

Recently, Thailand’s Siam Commercial Bank (SCB) became the first financial institution on RippleNet—which connects banks and payment providers—to pioneer the multi-hop function, which allows it to settle payments on behalf of other financial institutions on the network. 

The function allows SCB to act as a regional clearing partner and is able to receive and forward on payments on behalf of other financial institution without a bilateral relationship between the originator and beneficiary institution. 

“This helps to democratize payments in regions like Asean,” he says, adding that currently more than 100 customers of RippleNet institutions, including those sending payments on behalf of remitters and SMEs, are able to make cross-border payments in a streamlined process that is faster, cheaper and more transparent.

Through SCB, financial institutions will have more efficient and effective access into a variety of markets in Asean, regardless of payment size or their pool of liquidity.

Those in the region relying on correspondent banking systems must convert currencies into US dollar before settling across multiple correspondent banks before being exchanged into the currency used on the beneficiary’s end. 

“The reason why currencies need to be exchanged into US dollar before settling at various correspondent banks is due to issues with liquidity efficiency, especially with smaller financial institutions, SMEs and remitters who do not hold sufficient liquidity in the target currency so exchange through the US dollar,” Treacher says.

The lack of standard integration also means a lack of support for low-value payments, he adds. 

Using the multi-hop feature, institutions can link up with bigger banks in the target country which have enough liquidity to receive and then forward their cross-border payments in the preferred currency. This removes the need to first convert into US dollars and does away with the need to settle at various correspondent banks.