As the adoption of Ripple based solutions is increasing amongst banks and financial institution, Ripple is now developing and customizing products that provide solutions to specific problems of certain financial institutions or one specific to the region. The recent addition to this list is the “multi-hop” feature which tries to provide a solution for regions of the world where cross-border payments are inefficient and plagued with high fees.
Ripple’s “multi-hop”: a solution for smaller financial institutions to boost liquidity
Ripple, being now a partner to all leading financial institution around the globe, understands it well that inefficient management of global liquidity is the biggest hurdle for cross-border payments in all regions across the world. It also realizes the fact that certain regions of the world like the South East Asian region have been largely underserved by correspondent banking making cross-border payments difficult despite the best of technologies that Ripple can provide. To tackle this situation and to problem expand its client base to territories which face issues like these, Ripple has introduced a new product feature called “multi-hop”. This new feature now allows smaller financial institutions to settle frictionless payments on behalf of other financial institutions on the network.
The “multi-hop” also eliminates the need for a direct one-to-one connection (or bilateral relationship) between financial institutions to settle a payment. Using multi-hop will be able to receive and forward on a payment without a bilateral relationship between the originator and beneficiary institutions.
A lack of a standard integration for regional cross-border payments currently requires expensive workarounds. Neighboring countries relying on the correspondent banking system have to first convert currency into U.S. dollars, then settle across multiple correspondent banks before finally being exchanged to the currency used at the beneficiary institution. This cumbersome process requires numerous fees, including two sets of foreign exchange.
The first bank to use this product will the Siam Commercial Bank (SCB) which despite being one of the largest banks in the ASEAN or the South East Asian region, is facing issues of correspondent banking with its neighboring regional countries. SCB is the oldest and the fourth largest commercial bank in terms of total assets, deposits, and loans. Understanding changing times, the bank is adopting digitization and plans to reduce its branch network 1,154 branches to 400 branches by 2020. It also has 108 foreign exchange kiosks and 9,142 ATM networks.
The press release also states the benefits multi-hop can provide to SCB and the ASEAN region. It quotes
“With multi-hop, financial institutions can connect directly to SCB, which can settle and payout across the region without exchanging currencies multiple times and adding heavy fees. The result is a seamless payment experience into and out of the ASEAN region. For smaller financial institutions which previously did not have the ability to make payments into ASEAN, multi-hop will democratize access to those countries and make payments easier, regardless of payment size or their financial institution’s pool of liquidity.”
Multi-hop could be a great help to SME sector- and also add to Ripple’s reach
As this new product feature reduces fees significantly, democratize access to countries and make payments easier, regardless of payment size or their financial institution’s pool of liquidity., the major beneficiary of this product would the SME sector. Currently, with the traditional banking, the process of cross-border payments is cumbersome (as explained in the above section) and requires numerous fees, including two sets of foreign exchange and leaves the SME’s with little to no support for the low-value payments that small to medium enterprises (SMEs) need to make.
If SME’s can leverage this product well in the ASEAN, it will also multiply the Ripple’s reach and adoption as SMEs are a budding sector in the ASEAN and are estimated to be responsible for up to 60 percent of employment in the developing world, but that number is thought to be as high as 70 percent in ASEAN countries.
Will the “multi-hop” feature help Ripple gain clients in territories like the ASEAN? Do let us know your views on the same.