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"Nostro Accounts." It's one of those words I heard thrown around by ForEx traders on the forum when they were talking about Ripple. I remember my eyes kind of glazing over and thinking "Okay, blah blah, Ripple will save them some money there..." That was good enough for my thinking at the time, but since then I've done some further reading, and with recent banking adoption taking center stage, I thought I'd review it again. In addition, Ripple has specifically indicated that they are targeting nostro accounts (source: https://ripple.com/files/xrp_cost_model_paper.pdf) I was surprised by how simple the concept is, really, and it makes perfect and logical sense. Not all banks will want to do business in France, for example. Some just do business in ... lets say, the United States. An Example You Can Understand Bank "US" is a U.S. Bank based only in the US Bank "FR" is a French Bank based in only France A "nostro" account means that the US Bank opens an account with FR like they are a customer. Banks can do this. Then the US Bank buys up a bunch of Euros and puts them into that account (in their account with the French bank). They're doing this in anticipation of having to make payments in Euros out of their account at the French bank. (source: http://www.investopedia.com/terms/n/nostroaccount.asp?lgl=myfinance-layout-no-ads) Are you with me so far? That's it.... that's a nostro account. How It Works: A Simple ForEx Transaction So here's how a transaction works at it's most basic level: Let's say you are planning on working in France for six months. You go to your bank here in the US, and tell them, "Hi, I'd like to transfer $25,000 worth of Euros to an account I just opened at a French bank. But I don't have any Euros - I just have dollars here in the U.S." Your bank will then take your money, deduct it from their account having USD here in the US, and then do another entry in their account at the French bank, crediting it with the spot rate equivalent of Euros for $25,000. The number of Euros you get is known at the time of transfer. But they've got to charge you some fees associated with that transfer. Sure it's convenient for you, but remember, they had to open an account, and then buy a bunch of Euros. They have to hold Euros in this "nostro" account. Basically the lesson is this: for each country that a bank or institution wants to do a lot of business with, they should "hold" a lot of that country's currency on the other side of the border, so that they can do transactions most quickly and efficiently. Now you can see why financial institutions didn't like the idea of a "Brexit". Now the Euro will not cover the largest European country (by GDP), and they will have to buy up British Pounds at some point. That's the good thing about a Euro - it acts like XRP does, standardizing the transaction to many different countries. (source: https://en.wikipedia.org/wiki/Nostro_and_vostro_accounts) What Does This Have To Do With XRP? XRP takes the place of nostro account holdings. If banks in fifteen different countries use XRP as the "bridge" asset, then those banks no longer have to hold the fiat money of those other countries. They just have to hold XRP. Are you starting to see the magic? XRP could save banks up to 42%, even with XRP at HIGH volatility. (source: page 9 of https://ripple.com/files/xrp_cost_model_paper.pdf) There is nothing stopping XRP, and that's why banks are signing up at an increasing rate!
Kudos to @yra77 for posing this new link in the zerpbox: https://www.cryptocoinsnews.com/bbva-ripple-money-transfer/ While there's a separate thread related to the BBVA news, this particular article mentions something interesting. While I hope it's true, Ripple's own material (PDF HERE), says Ripple tech saves up to 42% in a low volatility environment. This article is now claiming 81% savings using Ripple. While I hope this is true, I think that number needs some scrutiny (anyone want to email the author?).
Ripple created a very nice tool for banks to quantify potential savings using the Ripple tech stack. If you haven't seen it yet, take a look here:https://ripple.com/cost-model/ @miguelUnfortunately the tool has no option to calculate additional savings utilizing XRP. Considering how this tool has been promoted via twitter etc, this seems like a miss. If this Ripple Insight highlighting additional savings related to XRP remains true, I hope we will see it added.