It all started with the distinctive screech of Telex machines across banks all over the world. But “you are too young to recall” it, says Dilip Rao. His colleague Sagar Sarbhai interrupts him to note, “I was not born then. I’m pretty sure he was not born either,” he says, motioning towards Rao.
Rao is the global head of infrastructure innovation at payments technology company Ripple and Sarbhai heads the government and regulatory relations for APAC and the Middle East at the firm. They are talking about the era before the Society for Worldwide Interbank Financial Telecommunication (Swift) which provides a messaging network to banks. The four-decade-old service is used by 11,000 banks around the world and handles around half of the world’s high-value cross-border payments.
Except no technology can go 40 years without hiccups and promising competition. Ripple, a company growing fast in the distributed ledger technology (DLT) space within the global payments market, is giving Swift a tough challenge on both fronts.
Oldschool Swift isn’t fit to process low-value payments which are in abundance in many global corridors, an underserved market that banks want to tap into. It is in these corridors, right now, that Ripple is being adopted by banks. Ripple can handle large as well as low-value transactions a lot faster and cheaper than Swift. This poses a threat to the incumbent’s very existence.
The global payments market is huge and it is vital to the topline of banks. In 2016, the global payment revenues stood at $1.6 trillion and accounted for 34% of overall banking revenues. It is estimated to become a $2 trillion industry by 2020 which will contribute 36% to the overall banking revenues, according to a report by management consulting firm McKinsey.
Today, Swift, to put it mildly, is not so swift. The messaging network could take hours or days to pull off transactions that Ripple can settle within seconds. Besides, Swift has not kept pace with innovation and improvements either.
Many former and current senior members claim that the messaging platform has been cognizant of its weaknesses but has not taken prompt measures to address them. In fact, the infamous Punjab National Bank fraud could’ve possibly been avoided had it not been for a vulnerability in the Swift system, suggests Ripple. “The perpetrators of the fraud uncovered a vulnerability where the system that sent the message of a payment was not linked to the system that actually settles the payment,” Ripple said in an email response to a questionnaire sent by The Ken.
Not just that. In the Bangladesh Bank robbery of 2016, hackers were able to steal $81 million by using a malware which allowed them to hack into the bank’s Swift software.
Ripple claims to have a fix. Many in the distributed ledger technology (DLT) space are trying to push out incumbents like Swift, but where most of them have a hammer and are still in search of a nail, it appears Ripple may just have hit it on its head with cross-border payments.