Cross-Border Payments: The Role of Data Standardization in Achieving Frictionless Payments
In society today it’s safe to assume that composing, sending, receiving and interpreting email is second nature. We do it across different devices, on the go, in meetings, at work, at home — you name it — and we do it efficiently and effortlessly. If we were to ask Malcolm Gladwell, he’d say that of course we’ve collectively reached this level of competency as most of us have certainly exceeded the golden 10,000 hours rule. But there’s something even more fundamental here: the standardization of information.
Our standard email contains From, To, CC, Bcc, Subject and Body. Each field serves a specific purpose and meets a minimal requirement in order to send an acceptable message. Even within each field there are norms and standards that apply. Email address structure, for example, includes username@domain. The structure won’t change regardless of your service provider.
This is how we should think about the structure of cross-border payments. If we want to ensure that the process is efficient, fast, defined and scalable, there simply must be a base level data requirement. Unfortunately, there is no clear standard for cross-border payments — and the shortcomings have never been more evident.
A World Without (Standards)
In the realm of cross-border payment solutions, a network without standardization is one of inefficiency and redundancy where everything is negotiated on a bilateral basis or dictated by a central operator. If that sounds dramatic, revisit the email analogy — at the bare minimum, there is a constant sense of palpable discord.
Historically speaking, there have been many different standards followed with various levels of consistency for cross-border payments. As a result, transactions that ought to be seamless and routine create friction and confusion due to incompatible or incomplete data formats. According to a speech made by the Bank of England on the CPMI Building Blocks and Focus Areas for Enhancing Cross-border Payments, 60% of payments require some sort of manual intervention, and this intervention can cost 25 to 30 times the cost of processing the payment itself1. Even more fundamental is the actual definition of settlement finality. Without consistent standards, each institution on a network will maintain differing expectations, resulting in contractual complexities and disparate experiences across multiple partners.
Simply put, global payments standards are fragmented. Correcting what should be typical network activity often requires manual intervention, thus introducing more complexity, more time added and greater inefficiency and increased cost. At Ripple, however, we’ve identified and implemented the solution that our customers are taking advantage of today.
A Single Rulebook Governing a Global Network: RippleNet
At Ripple, we’re empowering our members to define the future direction of cross-border payments. The members — those RippleNet customers who sign on to the membership agreement — drive the evolution of the standards to ease the path to scaling and enhance the payment experience on RippleNet.
When it comes to settlement finality and data standard practices and data requirements, that means clarity over interpretation; unity over differentiation; guidelines over guesswork. RippleNet was founded on consistency, transparency and equality and is proud to be progressing toward this next step in global interoperability.
Access & Equality
All payment networks have a “payment scheme.” Effectively, that means each has its own definition of a governing rulebook. The scheme typically includes transaction implementation guidelines, operational processes, technical specifications and numerous other member obligations. On one side of the spectrum, there are many schemes that do not allow for any member input whatsoever. On the other end, there are flimsy, inconsistent data standards that cause confusion across the network.
However, RippleNet strikes the sweet spot. There is a single rulebook that members have equal ownership of, and to which members adhere. Even more importantly this rulebook is governed by the members themselves – they have control. Further, the governance and participation model of RippleNet was designed to be inherently agnostic of institution type and location. RippleNet does not differentiate between banks and payment providers — members have direct access and an equal say in the rules for the network.
Consistency & Transparency
The first step was to address the issue of settlement finality on a peer to peer network to ensure there was a consistent interpretation of data standards across the network. Paramount to achieving this is the ability to provide transparency and predictability to a party’s obligations in a payment, specifically at the moment that obligation to make a payment transfers from one member to another. In turn, we designed a multilateral framework for what would have previously been agreed upon on a bilateral basis.
The second step was to address the widely varying data standards that can exist across a peer to peer network. The key is to enable each member the freedom to operate per their jurisdictional requirements, while at the same time standardizing data to bring predictability to the partnering process and consistent interoperability with domestic networks regardless of the origination and destination of the payment. Through the formal governance structure and the support of Ripple, the members created a global standard for RippleNet — a minimum set of data that is required to be passed between members, with clear guidelines on position, formatting and purpose of the data.
This clear standardization of data allows the RippleNet network to minimize inefficiencies, redundancies and overall confusion. For RippleNet customers this simplifies the deployment and further reduces operational overhead.
These standards are underpinned by ISO 20022, which is steadily becoming the standard for the world’s cross-border payment flows. In June of 2020 we proudly announced that Ripple became a member of the ISO 20022 Registration Management Group (RMG) standards body — and the first partner focused on Distributed Ledger Technology (DLT). Participation allows Ripple to be the voice of our members beyond the ecosystem of RippleNet.
The world is converging on a new global standard and stepping into the future. As with any challenge yet to be explored, we can’t say for sure what lies ahead, but we’re excited to be leading the charge into the next era of cross-border payments, network interoperability and blockchain technology application as a whole.
Interested in joining us on this journey? Learn more here. Check out our ISO 20022 one-pager to get more information on how we’re changing the world of global payments.