On Friday (28 September 2018), cross-border payments solution provider Ripple announced via a post on its “Insights” blog that Siam Commercial Bank (SCB), Thailand’s first domestic bank (founded in 1906), has become the first financial institution on RippleNet to use the ‘Multi-Hop’ feature.
SCB was established by royal charter on 30 January 1906 as the first Thai bank. It was founded during the reign of King Rama V, and it was “the brainchild of Prince Mahisara Rachaharuthai, who earned the sobriquet ‘Father of Thai Banking’.” Today, it is the third-largest bank (by total assets) in Thailand.
Although management of global liquidity is a long-standing problem in the area of cross-border payments, it is especially noticeable in the ASEAN (Association of South Eastern Asian Nations) region, which does not have that many correspondent banks. This has meant that sending money to the ASEAN countries (Brunei, Cambodia, Indonesia, Lao PDR, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam) has been expensive.
Today, SCB became the first member of RippleNet to make use of RippleNet’s “multi-hop” feature, which allows one financial institution to settle payments on behalf of another financial institution. This obviates the need for a bilateral relationship (i.e. “a direct one-to-one connection”) between financial institutions for the purpose of payment settlement. This important feature of RippleNet will allow SCB to “receive and forward on a payment without a bilateral relationship between the originator and beneficiary institutions.”
Currently, since there is no standard integration in the ASEAN region, neighbouring 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.” Because of the expense associated with such work-arounds, “there is little to no support for the low-value payments that small to medium enterprises (SMEs) and remitters need to make.”
Multi-hop technology means that SCB can provide “a seamless payments experience into and out of the ASEAN region” (by settling and paying out across this region without the need to exchange currencies multiple times). This feature makes it possible for smaller financial institutions to send payments to the ASEAN region even if the payment amounts are small or if these financial institutions do not have deep pools of liquidity.
Finally, it is not just financial institutions that can benefit from the multi-hop feature: customers of RippleNet members will be able to enjoy faster, cheaper, and more transparent cross-border payments.
Perhaps, it is best to let David Schwartz, the Chief Technology Officer of Ripple, to explain the multi-hop feature:
Multi-hop allows customers who initiate payments w/ xVia to have 1 pile of fiat, typically with an xCurrent customer, that they can use for payments across RippleNet. Still need to acquire the destination asset to settle a payment though, and that's where xRapid and XRP come in.
— David Schwartz (@JoelKatz) September 28, 2018
Looking at it from the other side, multi-hop lets xCurrent customers act as hubs for incoming and outgoing payments to and from regional banks that they have good fiat settlement arrangements with. Others could also use xRapid to pay into and out of the hub's partner banks.
— David Schwartz (@JoelKatz) September 29, 2018
Schwartz then explained what he means by “regional banks”:
I mean RippleNet members that have good fiat settlement rails with the hub bank. The idea is that correspondent banking with a modern payment system works well between banks that can already easily settle. Then the cluster of banks becomes like a single endpoint from outside.
— David Schwartz (@JoelKatz) September 29, 2018
He then continued to explain the significance of multi-hop:
It's an expansion of reach. With multi-hop the set of available endpoints is greater than it would be without it. Getting xRapid to connect to a region is better than getting xRapid to connect to a bank.
— David Schwartz (@JoelKatz) September 29, 2018
Some banks may just not be willing to become an xRapid customer for various reasons such as regulatory or just international payments not being that important to them. Multi-hop means they can use other xRapid instances to settle their payments and still get many of the benefits.
— David Schwartz (@JoelKatz) September 29, 2018
Another nice summary of why multi-hop is such a big deal comes from Dilip Rao, Global Head, Infrastructure Innovation at Ripple:
Why @Ripple Multi-hop is important
‘Multi-hop’ on RippleNet solves for (1) reach and (2) liquidity with (3) lower risk than via traditional correspondent banks today. (1/4)
— Dilip Rao (@diliprao) September 29, 2018
A ‘multi-hop’ transaction consists of coordinated debits and credits on the ledgers of three or more banks in a chain, from sender to ultimate beneficiary. (2/4)
— Dilip Rao (@diliprao) September 29, 2018
@Ripple Multi-hop for reach: Banks don’t do business with banks they do not know (due diligence and account opening can take 6-9 mths!). Multi-hop enables a bank to connect indirectly (via a bank they share accounts with) to many more they do not know. (3/4)
— Dilip Rao (@diliprao) September 29, 2018
Multi-hop for increased liquidity: An intermediary ‘hub’ bank acts as a ’connector’ as well as an ‘exchange’ to deliver funds at the next bank in a chain, perhaps in a different currency (for a fee).
— Dilip Rao (@diliprao) September 29, 2018
While this works with fiat today, the use of XRP would enable intermediaries to expand their delivery network without holding piles of fiat all over the world. Holding a universally convertible digital asset is more optimal (forecasts for might be 5-20% wrong).
— Dilip Rao (@diliprao) September 29, 2018
Multi-hop for lower risk: Since all banks in a multi-hop chain can see all transaction data and approve each after screening, AML/CFT risks can be better managed. Since ALL legs of an ‘atomic’ transaction settle at the same time, no bank is exposed to credit risk at another.
— Dilip Rao (@diliprao) September 29, 2018
Featured Image Courtesy of Siam Commercial Bank
