Almost every day, there is an announcement of a new payments innovation. From the success of the likes of Klarna, Stripe and Square in retail payments to the growth of new payment mechanisms like Ripple and JPMorgan’s internal settlement engine, the JPM Coin and the launch of digital currencies from bitcoin to Libra from Facebook, everyone seems to have a good idea about how to change the payments landscape. Investors believe in these firms too, with many of the largest companies spawned in the internet age and worth billions focused upon payments innovations. Adyen is a notable breakthrough after its IPO in June 2018, valuing the firm at $8.3 billion then and now at almost $20 billion just over a year later.
One of the ongoing discussions in all of this is the role of SWIFT, the interbank network for cross-border messaging. Many throw rocks at SWIFT as an organisation that has aged. The organisation dates to the 1970s but has never sat on its laurels. It is, after all, the cooperative network representing over 11,000 institutions. However, much of the rock throwing about how it works is mis-placed. A good example is the clearance of funds through the SWIFT network. This can take an inordinate amount of time, or so it appears. I recently received a cheque from an American client, by way of example, which took two months to clear and cost a fortune.
Some compare this with the speed of distributed ledgers and blockchains, such as Litecoin. Litecoin processed a single transaction between two users in April 2018 valued at nearly $100 million. The transaction took just over two minutes to process for a cost of $0.40 cents. However, the blame for slow clearing of payments and transactions is not at SWIFT’s door, but with the structure of banks. Therefore, it is interesting to note how the conversation is changing.
For example, a decade ago I heard many network organisations claiming that SWIFT would be replaced. A decade later, it’s as strong as ever. A decade ago, the cooperative processed 3.76 billion messages (2009); in 2018, the system managed 7.8 billion messages which is an increase of 11 percent over 2017, and 56 percent over the last five years. That’s around 31 million messages a day.
Nevertheless, there has been a lot of sabre rattling to challenge SWIFT, particularly from blockchain start-up Ripple. Brad Garlinghouse, the CEO of Ripple, is regularly quoted in the media saying that SWIFT has passed its sell-by date. Some of the most recent comments are from June 2019 when, in an interview with Bloomberg, Garlinghouse said: “What Ripple is executing every day is to take over SWIFT. Currently, we’ve signed up over 100 swift-enabled banks that are now using the Ripple technology … the technology used by the banks today that SWIFT developed years back hasn’t really evolved or even kept up with the current market.”
He is wrong when he says this, as SWIFT recently launched a new service called gpi (Global Payment Innovation) to address these issues. Launched in 2017, SWIFT gpi has over 500 banks onboard and claims an average five minutes to process a cross-border payment. That’s getting faster. During summer 2019, SWIFT trialled a new instant payment processing service on gpi with 17 banks in seven countries: Australia, China, Canada, Luxembourg, The Netherlands, Singapore, and Thailand. The trial showed that a transaction could be processed from Australia to Singapore in just thirteen seconds, whilst the longest took twenty-five seconds.
SWIFT is also not ducking the blockchain dialogue, partnering with R3 Corda for the gpi Link gateway. Maybe that’s why the recent Ripple hire of former SWIFT executive Marjan Delatinne is quite telling. After all the critique from Mr. Garlinghouse, the first interview I read with Marjan had her stating “we are not replacing SWIFT” but “can be very complementary”.
Her explanation of this is that SWIFT is just dealing with messaging and tracking rather than settlement, which his what Ripple claims to offer.
It will be interesting to see how the battle between SWIFT and Ripple pans out, as it has been ongoing now for a few years, but at least the diplomatic olive branch has been offered.