Ripple announced it is targeting the European SMEs (small and medium-sized enterprises) market, offering cheaper and faster cross-border payments.
Ripple (XRP) has become the most popular blockchain company among bankers. They are not so much interested in the cryptocurrency, but in Ripple’s enterprise software. More than 60 banks are already commercially deploying the technology, including big names such as Santander and the Royal Bank of Canada.
In a recent publication, XRP announced it is eyeing European small and medium-sized enterprises (SMEs). It’s obvious why banks work with Ripple, but there is also a clear value proposition for small businesses that are operating internationally.
Faster and cheaper payments
XRP promises faster, cheaper, and more efficient ways to transfer money globally. CEO Garlinghouse says the international banking system has “a speed problem, a cost problem, plus an error rate problem.” XRP has set out to fix all these problems.
Currently, international wire transfers between banks can take up to 24 hours and longer, and cost anywhere between $5 and $50, plus all sorts of banking fees such as foreign-exchange charges and landing fees. The error rate for wire transfers is between 3% and 5%.
International money transfers are mostly conducted via the Swift network, the Society for Worldwide Interbank Financial Telecommunication. Almost every bank worldwide is using Swift.
The major difference between Swift and Ripple is that Swift provides a one-way messaging service, while Ripple provides a two-way messaging service. That means there is greater transparency and banks can exchange information ahead of the money transfer. If any information is gone missing, both banks can find out before the payment is sent.
As a result, transfers are not getting stuck in the pipes. According to tests conducted by the Spanish bank BBVA, money transfers between Spain and Mexico using Ripple’s distributed ledger technology take only seconds, compared to the four days it normally takes.
And transfers are also cheaper. Ripple says its payment solution xRapid is saving customers 40-70 percent of costs compared to existing money transfer tools.
Transaction speed is crucial for just-in-time production
It’s easy to understand why cheaper money transfers and thus, lower banking fees, are beneficial for SMEs. But why is speed so important?
Speed probably doesn’t matter that much to private banking customers like you and me. But the fact that a money transfer within the EU can take up to 24 hours, sometimes even longer if the order was placed outside of banking hours, can result in high costs for businesses.
SMEs often use just-in-time orders to reduce inventory costs. Storing raw materials increases warehouse costs and just-in-time production allows manufacturers to assemble products after the order was placed, ensuring they won’t sit on their raw materials for a long time.
Now, if a small business from Germany wants to buy just-in-time raw materials in Spain, that purchase will almost always have to be pre-paid. SMEs usually don’t have an international reputation; thus, most suppliers won’t deliver without money in the bank. If the transfer is delayed, products will arrive late, and the entire production cycle will be delayed. That costs time, and time is money.
The problem is even more severe when EU-based SMEs source material from emerging markets outside of the EU. Considering that some of the cheapest suppliers to the EU are based in Ukraine, Russia, and Serbia, this is not a rare scenario. Paying these suppliers via traditional banking channels “is an expensive process that takes anywhere between three and five days,” says Jiri Kobelka, CEO of Tatum Blockchain API.
Thus, faster payments could improve supply chain efficiency, not only across the European continent but internationally. Kobelka says, “I believe that if more European banks use blockchain for cross-border payments and allow their SME clients to benefit from faster, cheaper remittances, it will shift Europe’s economy to the next level and open the market for opportunities in the international trade.”