paying with credit card

An infrastructure approach to improving Financial Inclusion

Guest post by Ryan Zagone & Danny Aranda, May 1, 2015

The Better Than Cash Alliance is introducing an occasional series on innovations that have the potential to reduce costs in digital payments. The first in this series is an article by Ryan Zagone and Danny Aranda from Ripple Labs, a technology company that develops real-time settlement solutions for financial institutions.

While electronic payments have widely noted advantages over cash – improved security and accountability, lower transaction costs, greater speed and broader geographic reach – the limitations of electronic payment infrastructure put many of these benefits out of reach of underserved people in developing and emerging economies.

The costs, risks and delays inherent in today’s infrastructure often limit electronic payment products to large-value transactions. In some regions, the cost of sending a cross-border payment may be so large that it is not economical or feasible for financial institutions to even offer low-value payment products. There are often significant cost and access barriers to sending a small-value remittance payment electronically today – precisely the type of payment poor communities use the most. For the benefits of electronic payments to fully reach the two billion people that lack financial services, new infrastructure that makes serving the poor more economical is essential.[1]

The development of payment networks

Payment networks first emerged to serve banks within one city or small geographic area. For instance, in London during the 1600’s, clerks from each of the city’s banks met to exchange checks and settle accounts. Over the next two centuries, central clearinghouses were developed to settle accounts between a larger number of banks.

Networks continued to evolve and serve broader geographic regions within the same country. The 1970’s marked the beginning of electronic funds transfers, which digitized payments and expanded settlement among financial institutions in an entire country (or group of countries using the same currency).[2]

Despite many technological breakthroughs in the last 50 years, payment infrastructure has not advanced beyond serving a single currency. While cross-border message services have emerged (such as SWIFT), no cross-border (or multi-currency) settlement rail exists.

In the absence of an international rail, banks sending payments across geographic (or currency) borders must rely on a patchwork of intermediaries to deliver the payments. Relying on intermediaries, commonly called correspondent banks, adds counterparty risk, settlement risk, fees and delays. These conditions increase the consumer’s cost of sending a payment, making today’s infrastructure focused on supporting large-value transactions.

New technologies have emerged that can drive the next generation of payment innovation and underpin the first cross-border rail that is able to economically support low-value payments.

Connectivity through new technologies

Ripple ComparisonOne example of new payment infrastructure technology is Ripple: a real-time domestic and cross-border settlement solution for financial institutions and payment networks. Ripple connects payment networks through an open protocol, a common communication standard not owned by any party. The protocol exists as a public good, enabling low-cost connectivity and allowing financial institutions to support underserved communities in a cost-efficient manner.

Ripple consists of a shared ledger that facilitates real-time payments directly from sending to receiving financial institution – across different networks, currencies and geographic borders. Ripple eliminates the chain of intermediaries required today, minimizing or eliminating their costs, risks and delays.

Payments settle in three to five seconds on Ripple, as opposed to the standard two to five days today. The ledger keeps a record of payments, which provides transaction visibility and supports banks’ anti-money laundering efforts.

Unlike today, where the correspondent bank dictates the FX cost, Ripple features a competitive marketplace for FX liquidity. Liquidity providers post bids to provide funding for transactions. Ripple’s algorithm routes transactions through the lowest-cost FX provider, helping compress a material cost of cross-border payments.

Importantly, Ripple provides connectivity at the settlement layer of a network – the foundational layer. It is not a complete payment network, rather is designed to connect existing networks. This enables each network’s existing rules, processes and messaging standards to remain in place, while supporting seamless, real-time value transfer.

As a service for financial institutions, Ripple enables faster payments within existing regulatory and consumer protection standards. Ripple supports all fiat currencies and – unlike Bitcoin and other alternative schemes – does not require the conversion into an alternative currency, which could pose significant volatility, counterparty and liquidity risk. Consumers enjoy the insurance and protections that they are accustomed to at their existing institutions and avoid exposure to any new risks.

A foundation to economically serve poor communities

Modern infrastructure such as Ripple minimizes risks, increases speed and supports compliance efforts, altogether compressing the cost of sending a cross-border remittance payment.

Ripple’s benefits enable financial institutions and payment companies that consumers are already familiar with to profitably support small-value payments for the first time. The shared ledger and liquidity marketplace create a foundation on which new payment products can be built to meet the needs of the underserved. Ultimately, these products can become gateways to other financial resources and broader inclusion in the global economy.

Addendum: On Tuesday, May 5th 2015, Ripple Labs reached a civil settlement with the U.S. Attorney’s Office and FinCEN following a review of the company’s past financial compliance and reporting. The company has taken a number of important steps over the years to build and strengthen its compliance programs. Ripple Labs is committed to supporting a healthy and compliant ecosystem surrounding innovative technologies.


[1] The World Bank’s Global Findex 2014, http://www.worldbank.org/en/programs/globalfindex/infographics/infographic-global-findex-2014-financial-inclusion

[2] Electronic Funds Transfer Association, http://efta.org/history/

About the Author

Ryan Zagone & Danny Aranda

Ripple Labs

Daniel Aranda, Director of Business Development, Ripple Labs - Danny@ripple.com Daniel works with payment solutions providers to bring new Ripple-enabled products to market and manages adoption of the protocol by financial institutions in new and emerging markets. Prior to joining Ripple, Daniel worked on payments and technology, performing mergers and acquisitions for the technology industry and cofounded an enterprise donation startup. Daniel studied Diplomatic History at the University of Pennsylvania. Ryan Zagone, Research Lead, Ripple Labs - Ryan.Zagone@ripple.com Ryan works with financial institutions, regulators and central banks on infrastructure and faster payments initiatives. Prior to joining Ripple, Ryan focused on payments and banking technology at Deloitte and worked on financial regulation at the American Bankers Association.

Learn more about Ryan Zagone & Danny Aranda

Ryan Zagone & Danny Aranda

Ripple Labs