Question re ILP enables banks to transact directly, without correspondent banks

[sgkoala]

Hi all - I am fascinated by Ripple and just trying to learn more about the mechanics. 

Ripple says that ILP enables banks to transact directly, without correspondent banks. However my understanding is that if the transaction is in a Fiat currency, there have to be connectors which exchange an IOU/asset issued by the ordering bank, to an IOU/asset issued by the beneficiary bank. 

Example, imagine a USD payment from a customer of Santander UK to a customer of Standard Chartered Singapore. Today, the payment may be routed as 

Santander UK -> Deutsche Bank US -> (Fedwire) -> StanChart US -> StanChart Singapore. 

Ordering Bank -> Sender’s USD Correspondent -> (USD Clearing) -> Receiver’s USD Correspondent -> Bene Bank

Now the same payment under ILP: Assuming Santander UK and StanChart Singapore are ILP enabled, in order for the USD payment to be made end-to-end as an atomic ILP transaction, it still needs to find a path through connectors unless the Ordering Bank and Bene Bank have bilateral USD nostro accounts (unlikely). These connectors might end up being the same Deutsche Bank US, Fedwire, and StanChart US unless there is a shorter path via XRP (e.g. Santander UK USD <--> XRP <--> StanChart Singapore USD)

ILP definitely brings many benefits (atomic transaction, faster settlement, up-front visibility of fees, overall reduction of fees, delivery confirmation), though I am not sure if ILP is really able to get rid of correspondent banks unless this statement implies routing via XRP. 

Is my example correct or did I miss something? Thanks for your help!

[JoelKatz]

Direct settlement with XRP in each transaction is not the only possible routing. For example, they can net transactions and settle imbalances with XRP. They can net transactions and fix imbalances by letting the rates change.

Even if there winds up being a bank in the middle, it's still vastly superior to today's corespondent banking because:

1) The amount that will be delivered is known before the transaction takes place.

2) Connectors can compete with the payment taking the best path.

3) The transaction can complete in a few seconds rather than a few days.

4) The sending institution and the receiving institution know the route ahead of time.

5) No money changes hands until the recipient institution has confirmed it will allow the transaction.

6) There are cost savings from the lack of the need to track the transaction's progress and fix its mid-flight exceptions.

And so on.

These differences are sufficient that it's a mistake to think that there won't be fundamental changes caused by them. When email was first talked about, it might have been tempting to think about how email might be used by thinking about what people send paper mail for today. You might even think, "Maybe 50% of paper mail is impersonal enough that an electronic substitute will do. So email systems might eventually handle half as many emails as letters are sent today." That would have completely missed the massive consequences of the improvements in speed and convenience.

[sgkoala]

Thanks David, that was fast!! The six benefits you listed are very clear, totally agree. I currently work in cash management sales to multinational clients, and the pain points in today's correspondent banking model are very real... I have CFOs and Treasurers personally chasing me to find out what happened to their payment...and often don't have the answer!

Just curious - is there an estimate on how many banks / gateways will need to be on-boarded to ILP in order to achieve a critical mass where a large percentage of global payment flows can be made via ILP? 

The netting of transactions and settling imbalances by XRP sounds interesting - where could I read up more about this? 

[thinlyspread]

Great thread!

[Apollo]

1 hour ago, sgkoala said:

ILP definitely brings many benefits (atomic transaction, faster settlement, up-front visibility of fees, overall reduction of fees, delivery confirmation), though I am not sure if ILP is really able to get rid of correspondent banks unless this statement implies routing via XRP. 

I think we will see a move toward new kinds of liquidity pools. I expect to see a few national or regional FX markets which will act as intermediaries in international ILP transactions. This would provide  deeper markets and still allow banks greater visibility and choice of payment path. XRP would still be useful as a digital asset to net out positions, even if it was not used in most payments. 

Edit: Just to be clear, I think it likely that ILP will break up the correspondent banking system because of the added visibility and choice of path. I am sure some correspondent banks will be able to leverage their position to be a liquidity provider, but an open market will have changed the nature of the business mottle. 

Edited October 7, 2016 by Apollo

[KarmaCoverage]

On 10/7/2016 at 6:17 PM, sgkoala said:

I have CFOs and Treasurers personally chasing me to find out what happened to their payment...and often don't have the answer!

Then you are a guy in the right position, at the right time, to explain the opportunity to Treasurers & CFOs. Have a watch of this video to get a basic understanding of a "Market for Float".  I think around the 20 minute mark he starts to explain the opportunity for Treasurers to engage in a market for float. I personally see both a cost savings opportunity, and a revenue opportunity for Treasurers.

On 10/7/2016 at 6:17 PM, sgkoala said:

Just curious - is there an estimate on how many banks / gateways will need to be on-boarded to ILP in order to achieve a critical mass where a large percentage of global payment flows can be made via ILP? 

To prime the pump, or have the network establish touch points in many markets, it will only take a few in individual markets, + time for others to notice & start trying to compete. There is already Earthport's offering.

On 10/7/2016 at 5:50 PM, JoelKatz said:

These differences are sufficient that it's a mistake to think that there won't be fundamental changes caused by them. When email was first talked about, it might have been tempting to think about how email might be used by thinking about what people send paper mail for today. You might even think, "Maybe 50% of paper mail is impersonal enough that an electronic substitute will do. So email systems might eventually handle half as many emails as letters are sent today." That would have completely missed the massive consequences of the improvements in speed and convenience.

I couldn't agree more! When ILP & the RCL (& other ledgers) get going, it will enable Economic Value to flow faster and provide a new route to flow around the roadblocks which smaller payments currently face. When ever you enable flow to increase in a system, the system generally improves. In an economic system, it is Value which flows; like blood flow in the human body, more flow is better. In my opinion the impact that this will have on the global economy cant be over estimated. New business models will come into play, and some industry lines may blur.

For instance, in a Market for Float world, the Corp Treasury Depts have a chance to sell  Liquidity, where traditionally Liquidity services have primarily only been sold by Banks. That is just one example. The point is that the blending & blurring of current industry lines will likely happen, & tend to employ new business models, which are enabled by the technology. Insurance is going to experience this also, as an expansion of the services they offer (data management), and their offering of indemnity will likely fundamentally change.

There is also the idea that we have reached a bit of a limit on the amount of economic activity that an individual firm can create, even the largest firms have a limit. Meaning that a new organizational structure is needed to expand the amount of economic value we as humans can create, we need Firms to be able to Network together. Here is a video which introduces this idea, watch through to 15:10 & back it up to 9:40 if you want a little more historical background.

Distributed Ledger tech may well enable this networking of firms. I actually view Ripple as one of the first of these new types of companies/business models, which serve to enable a Network of Firms. Ripple is doing this for Bank firms, & the new thing is the opportunity to include Corp Treasuries as actors in a liquidity network. ILP enables the networking of payment networks & ledgers.

Edited October 12, 2016 by KarmaCoverage

[Mercury]

On 10/7/2016 at 6:35 PM, Apollo said:

I think we will see a move toward new kinds of liquidity pools. I expect to see a few national or regional FX markets which will act as intermediaries in international ILP transactions. This would provide  deeper markets and still allow banks greater visibility and choice of payment path. XRP would still be useful as a digital asset to net out positions, even if it was not used in most payments.

I fully agree, I think we will see bank sponsored pools (low to no cost for them to use, fees charged for partner access) based on money corridors already in use. Thinking a North American (Canada, US, Mexico), Euro (EUR, Swiss Frank, UK) and others. There is already deep liquidity in these areas, trades are always netted out in quick time and the most likely partners are known and vetted. In the beginning pools like this would be used as a matter of convenience (faster payments, lower costs tied up in Treasury, proof of receipt, etc.) and and might be viewed more of a simple upgrade to the existing system. Over time pools might spread to unique use cases, such as by industry or geo-political (shipping, oil producers, boycott, etc.).

Ideally we will see more and more pools being used, perhaps outside the banking gatekeepers (can't anyone see a Walmart lead pool?).

[rippleric]

5 hours ago, Mercury said:

Ideally we will see more and more pools being used, perhaps outside the banking gatekeepers (can't anyone see a Walmart lead pool?).

I can definitely see a Google, Apple, Microsoft, IBM, Amazon, and WU lead liquidity pools  

[sgkoala]

9 hours ago, KarmaCoverage said:

To prime the pump, or have the network establish touch points in many markets, it will only take a few in individual markets, + time for others to notice & start trying to compete. There is already Earthport's offering.

If I understand right (based on diagrams at this link), there are a few different ways that Ripple and Earthport can work together, i.e.

1. Bank uses ILP API to initiate payment to Earthport. Earthport is then used to reach beneficiary who is not on an ILP-enabled ledger, using Earthport's access to local clearings (i.e. traditional rails such as SEPA, ACH). 

2. Bank uses Earthport API to initiate payment. RCL (or other platforms) is used to get the best FX rate from market makers, in a way that is transparent to the bank, and Earthport is then used to reach beneficiary. 

I believe if the beneficiary is not on an ILP-enabled ledger, some benefits will not be realised since ILP is not used end-to-end. For example, the payment cannot be executed atomically end-to-end, and the bank will only have certainty that the payment has reached Earthport but may not have visibility on when the beneficiary is credited. But I will be interested to find out more about what the bank & customer experience will be under this model, and perhaps there is another model that I haven't yet understood. 

[sgkoala]

34 minutes ago, rippleric said:

I can definitely see a Google, Apple, Microsoft, IBM, Amazon, and WU lead liquidity pools  

There are definitely corporates with huge cash balances sitting on current accounts or time deposits earning very little. These corporates often have a rather conservative investment policy. However, perhaps this will change over time. It looks as though global interest rates will remain at very low levels for the forseeable future. It would certainly be interesting if a corporate is able to generate much better returns on their cash (with very low risk) by being a liquidity provider to other corporates. We do see some corporates using their own cash in self-funded supply chain finance - a good description of how that works is here: http://www.euromoney.com/Article/3147353/Rise-of-self-funded-supply-chain-finance-threatens-banks-business-models.html

[Mercury]

We can also see the use of dark liquidity pools, private exchange executing large orders and then using ILP to link to other pools, perhaps a consortium pool like BidsTrading. Or having this in reverse, ILP linked pools compiling many smaller orders into larger ones to avoid market distortions.

[KarmaCoverage]

17 hours ago, sgkoala said:

If I understand right (based on diagrams at this link), there are a few different ways that Ripple and Earthport can work together, i.e.

1. Bank uses ILP API to initiate payment to Earthport. Earthport is then used to reach beneficiary who is not on an ILP-enabled ledger, using Earthport's access to local clearings (i.e. traditional rails such as SEPA, ACH). 

2. Bank uses Earthport API to initiate payment. RCL (or other platforms) is used to get the best FX rate from market makers, in a way that is transparent to the bank, and Earthport is then used to reach beneficiary. 

I believe if the beneficiary is not on an ILP-enabled ledger, some benefits will not be realised since ILP is not used end-to-end. For example, the payment cannot be executed atomically end-to-end, and the bank will only have certainty that the payment has reached Earthport but may not have visibility on when the beneficiary is credited. But I will be interested to find out more about what the bank & customer experience will be under this model, and perhaps there is another model that I haven't yet understood. 

Earthport is basically just operating a gateway which is both 1. connected to RCL, & 2. also connected to ACH/SWIFT/etc in other markets. Being connected to RCL is their advantage, being connected to the other payment networks gives them backward compatibility. There is nothing about Earthport which involves ILP, to the best of my knowledge.

In this graph, Earthport as a business is comprised in the larger blue circle labeled Gateway. The smaller circle which says Hub is actually RCL. The white Earthport logo on the right hand side should also be a blue circle labled Gateway, because Earthport has established the backward compatibility with the old payment rails, they are acting as both the In & Out gateway, both on boarding value to RCL and taking it off RCL at the TX's destination.

 

In this graph, going from left to right, I believe that the API the client is communicating with is Earthport's API... forget the stuff in the middle... and the APIs on the right are Earthport's API communicating with RCL's API (but they probably run their own Rippled), and communicating back to the Bank client what the FX rates and fees currently available on RCL. Nowhere in this TX is ILP involved.

ILP gets involved when we want to move a TX in between 2+ ledgers. So lets say I am running another instance of RCL for the purpose of creating a distributed Insurance network. All the users of this insurance network deposit money and carry balances on this Insurance RCL ledger. Now we have a claim and need a TX to move money off of the Insurance RCL ledger, over to the Ripple Payment RCL ledger for delivery to the final user... The Insurance RCL would initiate a TX request with an ILP Connector who has a wallet on both ledgers (Insurance & Payment RCLs). The Connector would quote out the FX & Fees, and the TX's value would leave the Insurance Ledger via ILP, and move through the ILP Connector who would then put the value onto the Ripple payment ledger via ILP, and send the payment to the user's bank on Ripple's Payment RCL, and finally the bank would record the deposit in the user's bank account as available for spending.

I only brought up Earthport because you asked...

On 10/7/2016 at 6:17 PM, sgkoala said:

Just curious - is there an estimate on how many banks / gateways will need to be on-boarded to ILP in order to achieve a critical mass where a large percentage of global payment flows can be made via ILP? 

Cheers