Ripple

Germany’s Fidor bank will finally begin completing international wire transfers via the Ripple virtual currency protocol next week, making it the first bank in the world to do so. The two companies first announced a partnership in May, but have evidently spent the time since working on integration. The bank also may have been using the protocol for behind-the-scenes interbank transfers before going live with customer transfers.

Reddit user Skysailer posted to r/Bitcoin an email that he received from the bank that reads (after translation by Google Translate):

First we would like to thank you for your loyalty!

We have continued to work in our services to make banking with Fidor even better: In brief, any time you can easily and quickly check your balance with the mobile Fidor account Motion widget on your Android smartphone. We also allow you soon same day and cost transfers abroad via Ripple. Due to the above-mentioned new products we will generally Expand Terms and Conditions for 27/08/2014. From 27.08.2014 You will be asked to login to your account to accept the new terms and conditions. You will also find a detailed explanation of the changes.

Best Regards

Your Fidor Bank Team

As the letter suggests, fund transfers processed via Ripple will occur same-day, making the protocol in many cases several days faster than traditional international wires. These transfers will also be significantly lower-cost than traditional wires.

The Fidor relationship is seen as a highly important test for Ripple, which, if successful, could lead to additional relationships with other banks around the world. Of course the opposite is also true and a negative result of this test could stunt Ripple’s continuing adoption.

For a refresher on Ripple, the protocol and associated XRP virtual currency are designed not as a transactional currency or even as a long-term store of value, but simply as an intermediary currency. For example, if a user in the US has funds in dollars and wants to send those funds to a user in India, where Rupees are the local currency, the traditional process would involve currency conversion fees. Using XRP, the sending user (or their bank) would exchange the dollars for XRP and then find another user on the network looking to exchange Rupees for XRP. With Rupees in hand, the transfer can be completed to the end recipient. All of this happens in seconds or minutes and at fractions of the cost of traditional wire transfers and currency conversions.

In short, Ripple is the way money transfer and bank settlements would be handled if they were invented today and not subject to decades of legacy technology, systems, and regulations. As I wrote in May:

When consumers and institutions alike attempt to move money around the world, it typically requires a number intermediary stops along the way, not to mention manual human intervention and far too many pieces of paper for the year 2014.

The problem is that, maddeningly, each country and each financial institution creates its own rules and its own system for executing such transfers. As a result, transferring money can often take days, costing non-trivial sums of money in the process, and introducing significant risk of fraudulent or failed transfers. The second order effect of this system is that it’s impractical to make small transfers, such as sending $20 from the US to India, for example, because such a transaction will cost more than its value.

Ripple was invented to address this very problem, offering a decentralized order book relying on open-source peer-to-peer payment protocols that allow financial information to move as quickly and easily as other data.

That said, Ripple is not the only company looking to solve this problem. Former Ripple co-founder (and before that Mt. Gox founder) Jed McCaleb branched out to start a competing, open source platform called Stellar that promises a similar approach to settlements. Stellar has partnered with payments giant Stripe and secured the backing of former PayPal and Square exec and current Khosla Ventures partner Keith Rabois. It could be argued that competition is ultimately a good thing for spurring innovation, but by the same token it ratchets up the pressure on Ripple’s early integrations to go smoothly.

Ripple has a major head start on Stellar and the benefit of an active banking relationship with Fidor. Beginning next week, we’ll see whether the company is the first to prove that virtual currency settlements are the way of the future, or the first to prove that the financial technology of the future still needs more work.

  1. Ripple is an open-source, distributed payment protocol. It enables nearly free and instant payments with no chargebacks and in any currency - including dollars, yen, euros, Bitcoin, and even loyalty points. Businesses of any size can easily build payment solutions, such as banking or remittance apps, and accelerate the movement of money on Ripple. Ripple enables the world to move value like information moves today. Ripple is currently in beta. For more information about Ripple, please visit http://www.ripple.com.