The Bankers Guide

to Blockchain for
Global Payments
December 2016
Moving Beyond the Hype
The world appears to be enamoured with blockchain. There are hundreds of books on
the topic, an impressive line-up of conferences worldwide, over 400 companies1 building
new businesses on this technology, and blockchain expert positions being defined within
leading organizations and across regulatory bodies. Some skeptics say its all hype. Others
are placing their bets on the types of uses cases that will be most meaningful. Either way,
its hard to ignore.

But what does it really mean for the banking industry and its clients? How can it affect the
global payments infrastructure? Will it find its way into the mainstreamand when? And
who stands to benefit? Our belief is that the blockchain, or distributed ledger technology
(DLT) as we call it, is here to stay and has the potential to be a game-changer. We imagine
a world that moves value just as easily as information moves across the Internet today.

But, first things first. We must crawl before we walk. The obvious first step is to modernize
the systems that fuel global paymentsthe underpinning of commerce and consumer activity.
In our view, this is the first and most impactful use case for DLT.

This paper provides greater perspective on using DLT for international payments. It draws
on our experiences partnering with global banks to help make cross-border payments truly
efficient, as well as research from analysts and thought leaders who are studying this space.

MATURITY PROFILES OF DLT USE CASES

Bilateral/Unilateral

Cross-Border Payments
Private Company
Securities
KYC/Digital Identity
Management
ASX Equities Clearing
Consortium Driven

Repurchase Agreements
Credit Derivatives
Suppy Chain Finance
Syndicated Loans
Trade Finance

Announcement PoC Pilot Implementation Broad Adoption

Industry research highlights cross-border payments as the most mature DLT use case. Source: Celent

1 Blockchain Startups, Angel Co, Nov. 2016, http://angel.co/blockchains

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Why Banks Are Evaluating Blockchain
for Cross-Border Payments
The banking industry is faced with a number of changing demands. First, global commerce
is rapidly growing. As a result, international payments are increasing at double the rate of the
global GDP.2 In a report in July, consulting firm Accenture PLC estimated that banks process
$25-30 trillion of cross-border payments annually, across 10-15 billion transactions.3

At the same time, corporate business models are evolving. Think about businesses like
Uber, Amazon and Airbnb. They are global from day one and are connecting consumers
directly with suppliers. Businesses like these have set the expectation that on-demand
delivery of goods and services is the new standard.

To support these businesses, financial institutions must adapt. They must be able to
instantly send international payments of all sizes in real time, not just across banking
networks, but also emerging financial networks, such as mobile wallets.

PAYMENTS REVENUE IN TRILLIONS (2009-2019)

CAGR, CAGR,
+6% (2013-2014) (2014-2019)
Percent Percent
2.3
+9%

+4% +11% +6%

1.7
1.5
1.0
1.5
1.4 0.7
0.7 +4% +7%
0.6
APAC 0.5 0.5
0.4 0.5
+22% +9%
0.4
EMEA 0.4
0.3
0.2 0.2
0.1 0.2
Latin America
+3% +5%
0.5
North America 0.3 0.3 0.4 0.4

2011 2012 2013 2014 2019F

Share of Total Banking

37% 38% 38% 40% 40%
Percent

Global payments revenues are growing exponentially. Source: McKinsey

2 As of Nov. 2016

3 The Journey to Real-Time Cross Border Commercial Payments using Distributed Ledger Technology, July 2016. Web. http://ripple.com/wp-content/
uploads/2016/07/Accenture_Ripple_CrossBorderPayments.pdf.

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Todays payment infrastructure simply cannot address these needs. Currently, it can take
up to five business days to disburse payments. In many cases, holding nostro accounts in
multiple currencies is not a cost-effective option. High-volume, small-value payments are
too expensive to process. There is no way to interoperate different networks globally.
Plus, payment error rates average 12 percent.4

As a result, banks are looking to DLT as a way to satisfy growing client transactional
demands, offer differentiated services and compete with non-bank payment providers.

MON TUE WED

20 21 22

Low-Volume High-Value Slow Batch Payments

The limitations in todays infrastructure force banks to process payments in batch, resulting in high processing costs,
lengthy settlement times, and a poor customer experience.

4 "How Does Migration to IBAN Format Impact Payments Integrity?" Experian, Jan. 2013. Web. http://www.experian.co.uk/assets/payments/
brochures/sepa-iban-whitepaper-jan-2013.pdf.

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The Benefits (and Limitations)
of Blockchain
By definition, distributed ledger technology uses a distributed network of servers to
cryptographically and immutably record global transactions without the need for a
central intermediary. It offers the promise of speed, transparency and reliability. For
instance, it reduces interbank transaction times from days to seconds. Also as shared
ledgers, blockchains afford transacting parties transparency into every transaction,
which can help banks increase processing rates and reduce reconciliation needs. As a
result, banks can offer customers faster, more transparent and reliable cross-border
payments while reducing their operating costs.

In working with banks to implement blockchain solutions the past few years, we learned
that blockchains have inherent limitations when used for interbank settlements. These
limitations are:

1. No transaction privacy. Blockchains record all transactions on a global public ledger,

whereas banks need to keep that data private to their institution.

2. Limited scalability. Blockchains are databases. As with any database, they encounter
a scalability ceiling so they cannot process trillions of transactions.

3. Lack of interoperability. To reap the efficiency benefits, every institution and payment
network would have to use the same blockchain. Because blockchains have scalability
limitations, this scenario isnt practical.

Weve evolved our enterprise solution to preserve the core benefits of blockchain while
addressing these issues. The result is a unique solution tailored to banks needs that
delivers these benefits:

1. Real-time payments with reduced settlement risk. Instant coordination of funds

movement across multiple ledgers accelerates settlement to near real-time. It also
removes settlement risk and delays in the payment process, even with multiple
intermediaries. Banks then no longer need direct reach (nostro accounts) across
all corridors to efficiently process payments.

2. Flexible liquidity provisioning. Banks can choose to utilize a marketplace of third

parties liquidity providers (bank or non-bank) to provide liquidity for processing payments.

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 This is an important option for low-volume corridors where its more difficult to source
competitive FX rates. According to the World Economic Forum, DLT reduces locked-in
capital and provides transparency into sourcing liquidity for assets.5

3. Lower operational costs. Unlike traditional financial messaging systems, Ripples DLT
offers transparency and enables banks to more efficiently exchange information about
the originator, beneficiary, fees, rates, delivery estimate and payment status. The end
result is higher straight-through processing rates, negligible tracking effort and lower
operational costs.

COST SAVINGS

$1,113K KEY COST SAVING DRIVERS

Payment processing Payment processing cost

$740K Higher STP rates
Elimination of SWIFT costs

Treasury operations cost

Lower in-ight capital
Lower liquidity cost
Lower counterparty risk

Reconciliation cost
Instant conrmation
Real-time liquidity monitoring

$ 442K COST SAVINGS PER CATEGORY

Payment processing Payment processing

Treasury $137K Today
$96K Treasury Ripple -81%
Reconciliation $74K Treasury
$77K Reconciliation
$31K Today
Ripple -23%
Receiving Fees Receiving Fees
$200K $200K Reconciliation
Today
TODAY RIPPLE
Ripple -60%

For an average payment of $500, banks can save 60 percent in total operational costs.6 Source: Ripple, Modeled
Use Case: Annual Payment Volume: $100M; Number of Annual Payments; Average Payment Size: $500; Corridor:
CAD/USD

5 "The Future of Financial Infrastructure: An ambitious look at how blockchain can reshape financial services." World Economic Forum, Aug. 2016.
Web. http://www3.weforum.org/docs/WEF_The_future_of_financial_infrastructure.pdf.

6 "Join the Global Real-Time Settlement Network. Ripple, Aug. 2016. Web. http://ripple.com/files/ripple-brochure.pdf. Modeled Use Case: Annual
Payment Volume: $100M; Number of Annual Payments; Average Payment Size: $500; Corridor: CAD/USD

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Commercializing Blockchain
Some skeptics believe that distributed ledger technology is all hype and no substance, a trend
noted by Gartner who recently reported that blockchain is nearing its peak of inflated
expectations.7

However, growing market adoption demonstrates a true customer need. According to

Greenwich Associates, banks alone will spend more than $1 billion on blockchain projects
in 2016.8 While the industry still has a way to go before DLT becomes the main fiber connecting
global payments, we have the unique opportunity to take part in the worlds first global
payment deployments using our own distributed financial technology.

"Using the Ripple solution, we are working on a new commercial payment service
for retail customers that will allow them to send money from China to the U.S. and
other countries in real time."
Andrew Fang, General Manager & Head of Innovation and Research at SHRB

Its our pleasure to see Santander UK win the Payments and Wallets award from Efma for its
International Payments app, which uses Ripples solution to enable its customers to make
faster and cheaper cross-border payments. Similarly, ReiseBank was named the Banking IT-
Innovation Award 2016 winner from the University of St. Gallen (Switzerland). Together with
Canadian ATB Financial, ReiseBank managed the worlds first live, real-time cross-border
payment in June of 2016.

This year also marked a major milestone for DLT. Founded by Bank of America Merrill
Lynch, Santander, UniCredit, Standard Chartered, Westpac Banking Corporation and Royal
Bank of Canada, the Global Payments Steering Group (GPSG) established itself as the only
blockchain bankers network with defined rules and governance. This group will oversee the
creation and maintenance of Ripple payment transaction rules and standards.

"We are joining the GPSG in order to contribute to the definition of the standards and
processes which the industry now needs in order to move ahead and build better
payments networks."
Julio Faura, Head of R&D at Santander

Is this the start of a new real-time global settlement network? In our humble opinion, we
think it is.

7 "Gartner: Blockchain and Connected Home Are Almost at the Peak of the Hype Cycle." Gartner, 16 Aug. 2016. Web. http://prwire.com.au/pr/62010/
gartner-blockchain-and-connected-home-are-almost-at-the-peak-of-the-hype-cycle.

8 Blockchain Adoption in Capital Markets. Greenwich Associates, June 2016. http://www.greenwich.com/fixed-income-fx-cmds/blockchain-adoption-

capital-markets.

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Regulators Recognize the Potential of
Financial Technology
As the financial industry increasingly embraces this new technology, regulators are also
taking an active role. They recognize the importance of emerging financial technology like
DLT and are developing initiatives to drive safe innovation. Recently, a set of broad trends
emerged in the regulatory sector.

Regulatory Sandboxes to Support Innovation

Sandboxes create a safe space for new and established companies to vet ideas with regulators.
Regulators across countries such as Singapore, Hong Kong and the United Kingdom developed
sandboxes to identify and mitigate risks of new solutions, understand the necessary licensing
and approvals, and ensure that regulations properly reflect emerging technology. This process
provides regulatory clarity to the participating company and results in an effective, well-
informed regulator.

International Regulatory Partnerships

Financial services has become increasingly global in scope, making it especially important to
build a regulatory framework that reflects the global nature of new payments technology.
In recent months, a number of countries have forged regulatory partnerships. The most
notable include the agreements between the U.K. and Singapore,9 the U.K. and Australia,10
and Singapore and Switzerland.11 These countries are taking proactive steps to encourage
technology innovation across each others markets.

"Innovation in financial services isnt limited by national borders and so its

important that we support overseas businesses that have new ideas that
could benefit British consumers."
Christopher Woodlard, Financial Conduct Authority9

9 "First Ever FinTech Bridge Established between Britain and Singapore." Monetary Authority of Singapore, 11 May 2016. http://www.mas.gov.sg/News-
and-Publications/Media-Releases/2016/First-ever-FinTech-Bridge-established-between-Britain-and-Singapore.aspx.

10 "British and Australian Financial Regulators Sign Agreement to Support Innovative Businesses." FCA, 23 Mar. 2016. http://www.fca.org.uk/news/
press-releases/british-and-australian-financial-regulators-sign-agreement-support-innovative.

11 Singapore and Switzerland to Expand Cooperation on FinTech." Monetary Authority of Singapore, 12 Sept. 2016. http://www.mas.gov.sg/News-and-
Publications/Media-Releases/2016/Singapore-and-Switzerland-to-Expand-Cooperation-on-FinTech.aspx.

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Connecting the Dots: Interoperability
An important and highly relevant question has emerged: how does DLT help banks easily
interact with the increasingly diverse types of payment networks? In our view, the ideal
design for a global settlement network is much like how the Internet is designed. All ledgers
should be connected with a simple, common protocol so that money can move around the
world just as information does online today.

"In coming months and years, innovators, investors, and financial practitioners
will no doubt make important strides in addressing key challenges such as
adopting common standards, achieving interoperability between and among
legacy systems and evolving distributed ledgers, improving scalability and
computational throughput, and improving cryptographic security."12
Lael Brainard, Federal Reserve Governor

The Bank of England agrees. In its recent consultation paper13 about the new real-time
gross settlement service for the U.K., it notes that the demand for simpler and more
resilient pathways for payments is increasing pressure for convergence between payment
systems, a trend that the bank judges is likely to continue over the lifespan of the next
generation settlement system.

A report by Celent also supports this position, citing interoperability, not only with legacy
technology infrastructure but also among DLT networks, as the critical need propelling
fintech innovation. Celent finds that interoperability will enhance the notion of network
effects so that solutions can be implemented quickly and seamlessly by all stakeholders to
maximize liquidity while also minimizing operational risk of transition.14

The good news is that there is an emerging global technical standard that provides this level
of interoperability: the Interledger Protocol (ILP). ILP can also work with any new network
or system, regardless of its underlying technology. And all banks and payment providers
from the smallest to the largestcan leverage the open protocol to power payments across
networks globally.

12 Brainard, Lael. "Distributed Ledger Technology: Implications for Payments, Clearing, and Settlement." Federal Reserve Board, 7 Oct. 2016. Speech.
http://www.federalreserve.gov/newsevents/speech/brainard20161007a.htm.

13 A New RTGS Service for the United Kingdom. Bank of England, Sept 2016. Web. http://www.bankofengland.co.uk/markets/Documents/
paymentsystem/cp160916.pdf.

14 Celent: Cross-Border Payments Most Mature Use Case for Distributed Ledger Technology. Ripple, Aug 2016. Web. http://ripple.com/insights/celent-
cross-border-payments-mature-use-case-distributed-ledger-technology.

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The Ripple Solution
Leveraging ILP, Ripples solution allows banks to efficiently transact with other banks
and payment providers to settle transactions in real time. Ripple eliminates time delays
and ensures certainty of settlement, resulting in new revenue opportunities and lower
transaction costs for banks and their customers. It is designed to interoperate networks.

Banks can also opt to use Ripples native digital asset, XRP, to reduce nostro accounts
and more efficiently provision liquidity for global payments. Blockchain consultant R3
and twelve of its consortium member banks recently completed a trial using XRP to
test its feasibility for scaling liquidity and reducing costs associated with cross-border
payments. We believe this pilot shows great promise of a blockchain-inspired alternative to
correspondent banking.

Adopting Ripple through one simple integration provides instant access to its growing
network, opening new corridors and revenue-generating use cases, including corporate
disbursements and retail remittances.

Benefits of Ripple

Access
Ripple enables access to a global network
of financial institutions and liquidity
providers. Banks no longer need direct
reach (nostro accounts) across all
corridors to efficiently process payments.
Certainty
Banks exchange payment and fee
information on Ripple before payments
execute, minimizing the risk of failure.
Funds settle between Ripple-connected
banks in seconds with end-to-end visibility
into every transaction.

Speed Cost
Ripples solution provides real-time Ripple reduces the total cost of settlement
settlement between banks. for every transaction, freeing up funds to
allocate elsewhere.

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Customers
Banks around the world have partnered with Ripple to offer more efficient cross-border
payment services to their customers and to gain access to Ripples growing, global network
of financial institutions and liquidity providers.

Partners
System integrators and technology partners facilitate the connection between financial
institutions and Ripples network. They can provide banks with consulting and turnkey
solutions that fit within their existing infrastructure.

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About Ripple
Ripple provides global financial settlement solutions to ultimately enable the world to exchange
value like it already exchanges information giving rise to an Internet of Value (IoV). Ripple solutions
lower the total cost of settlement by enabling banks to transact directly, without correspondent
banks, and with real-time certainty of settlement. Banks around the world are partnering with Ripple
to improve their cross-border payment offerings, and to join the growing, global network of banks
and liquidity providers laying
the foundation for the Internet of Value.

Ripple is a venture-backed startup with offices in San Francisco, New York, London, Luxembourg and
Sydney. As an industry advocate for the Internet of Value, Ripple sits on the Federal Reserves Faster
Payments Task Force Steering Committee and co-chairs the W3Cs Web Payments Working Group.

Contact Us

To learn more about how your bank can adopt Ripple,

please contact us at ripple.com/contact

Ripple Headquaters
300 Montgomery Street
Suite 1200
San Francisco, CA 94104
USA

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