RBS Trials Ripple Tech For Automated Interbank Transfers

In June 2012 an IT meltdown left 6.5 million Royal Bank of Scotland (RBS) customers locked out their accounts for days, and led to a £56 million fine in November 2014.

More recently on Wednesday June 17th, 2015 RBS suffered another IT fiasco after admitting it could take until the weekend for customers to receive 600,000 payments that failed to enter accounts overnight.

The next day, on June 18th, RBS CAO Simon McNamara announced a £3.5 billion technological revamp during a webinar to investors. The seminar focused on the bank’s three-year transformation plan, boasting about the bank’s technology achievements over the course of the past year. McNamara talked of the bank’s plans to reduce complexity by rationalising IT systems, retrofitting legacy architecture, reducing supplier count, and investmentment in Ripple technology for automated bank transfers.

From the slide deck the 2015-17 plan summary reads:

• £3.5bn of planned total investment spend
• Mix of addressing legacy issues, improving automation of core processes and innovation
• The 2015-17 plan underpins the bank-wide, 2019 target, of reducing cost-income ratio to below 50%

Their ambition is to be number one for customer service, trust, and advocacy in each of their business areas by 2020.

They have reviewed over 700+ ideas out of which 35+ have had the green light for a Proof of Concept or pilot. It’s interesting to spot Coinbase, Blockchain, and Ripple on the same slide, between the logos of numerous other companies, including the giants Google, Samsung and Facebook.

On the next slide, Ripple is described as a “disruptive international currency payment technology” and RBS outlines their “Aim to explore ripple technology and setup on our infrastructure.”

Furthermore they state to have “Developed new proposals for use of cryptocurrencies and supporting technologies.” This comes as part of an exploration in collaboration with Scottish universities (Dundee and Edinburgh) during Design in Action Chiasma, in February 2015. Teams at the event could win up to £20,000 to prototype business ideas related to the new technology.

"I don’t know what’s going to succeed. What I’m certain of is that we are going to see blockchain solutions, peer-to-peer solutions emerging in our industry and we want to be close to that development."
— – Simon McNamara, RBS Chief Analytics Officer

The collaboration with Ripple started last year when a team from RBS took the top prize at the Deloitte Digital #GoneHacking capital markets hackathon, with a trading platform that utilises the Ripple protocol to handle integration with cryptocurrencies.

RBS built on top of its existing service FXMicropay, which offers wholesale foreign exchange capabilities and automatic real time deal aggregation to businesses in order to price goods and services for customers in their local currency, basically shifting the FX market risk to the bank.

The team at RBS used Ripple Labs’ Open Source payments and remittance network to add various cryptocurrencies onto the FXMicropay service including Bitcoin (BTC), Litecoin (LTC), and Ripples (XRP).

Outside of the core functionality, presented during the hackathon, the RBS team have also explored the possibility of using the Ripple payments protocol and public ledger to replace the existing banking and Swift-based infrastructure.

The RBS team said they felt the emergence of crypto-currencies like bitcoin and blockchain platforms like Ripple, would lead to huge disruption in the capital markets and they, as a bank, wanted to be ready for that change.

RBS is not the only bank interested in Ripple. In May 2014 German Internet Bank Fidor became the first to use their payment protocol as part of its transaction infrastructure, although they have since distanced themselves from project.

In September 2014, CBW Bank and Cross River Bank became the first US institutions of their kind to adopt Ripple’s solution.

In May and June this year three of Australia’s ‘big four’ banks, the Westpac Banking Corporation, the Australia and New Zealand Banking Group (ANZ), and the Commonwealth Bank of Australia (CBA) started experimenting with peer-to-peer and intrabank transfers on the Ripple protocol.

But why are banks more inclined towards Ripple rather than Bitcoin? To answer that we need to first make a distinction between “permissionless” and “permissioned” ledgers.

Bitcoin which has thousands of miners managing transaction risk, while keeping the network in sync, is considered a permissionless ledger. Miners are incentivized with a reward, in bitcoins, for their computing power and energy contribution. It’s a trustless ecosystem by design, no one single entity has the ability to control or censor bad actors. Bitcoin is a decentralized protocol, in this scenario value transfers are final so neither a court order nor a colluding small number of participants would be able to freeze funds or levy fines. This is something banks or financial institutions are not big fans of, because the way they like to do business and the regulatory requirements imposed on them.

On the other end is a permissioned ledger, like Ripple, where transactions on the network are subject to the company’s own moderation and management, using its own servers to keep the network in sync. Ripple is therefore considered a centralized protocol, it eliminates the need for mining by requiring that all actors in the system establish trust relationships with each other, as well as with Ripple Labs itself. At the same time it allows the use of any other cryptocurrency by simply enabling gateways to participate in the network, i.e. a bitcoin exchange.

By using Ripple, banks are able to compete with Bitcoin and other cryptocurrencies as they have access to them. They could build an alternative to SWIFT for international settlements, for example, or even Western Union for remittances. While cutting operational costs drastically, Ripple fits perfectly with banks’ requirements, as well as regulatory ones.

Others in the space building permissioned ledgers include MultiChain, an open source distributed database for financial transactions. It builds on the technology that powers bitcoin to enable private blockchains with managed permissions.

“MultiChain is optimized to help financial institutions and service providers accelerate their exploration of blockchain technology.”
— – Coin Sciences Ltd, MultiChain Creators

There is also Stellar a clone of Ripple.

“Stellar is a technology that enables money to move directly between people, companies and financial institutions as easily as email. This means more access for individuals, lower costs for banks, and more revenue for businesses. Help better the world’s financial infrastructure by participating in our community or by building on Stellar.”
— – Stellar.org

A growing number of startups are building on various forms of blockchain tech to enable tokenization and leveraging of the blockchain beyond just payments like commodities, bonds, CFD’s, trying to overhaul the dated legacy infrastructure. Below are some of the most known players:

• Domus Tower
• Epiphyte
• Symbiont
• Blockstack
• Hyperledger recently acquired by Digital Asset Holdings
• Colu

Fintech is currently experiencing an explosion of venture capital investment and interest from old fashioned financial institution that are feeling the need to “rejuvenate” themselves to keep relevant, profitable, and alive. 2015 will be a very interesting year for fintech with new startups entering the space at a speed comparable to the dotcom boom of the early ‘90s. Let’s not forget that many of those dotcoms failed at the time, only a few were left standing, and even less survive to this day. Nevertheless we live in exciting times and thanks to Satoshi Nakamoto and his gift to the world, Bitcoin, we may have a good chance to radically transform banking and finance in a way that was unimaginable before 2009.