Ripple On Demand Liquidity

News 7 August 2021
Ripple On Demand Liquidity

Ripple announced the first live On-Demand Liquidity (ODL) service in Japan. The collaboration with SBI Remit, and SBI VC Trade will enable faster and more affordable remittance payments from Japan to the Philippines. 

So how exactly does using ODL improve remittance payments and how can companies and customers benefit from it?

Traditional Remittance

To talk about the improvements made by using Ripple, we first have to understand how remittance have been done traditionally. Remittance is a cross-border money transfer from foreign workers living abroad to their families back in their home country. The foreign worker’s hard-earned money is essential for the household income in the receiving countries. This is especially true for the Philippines where remittance accounts for almost 9 percent of the country’s GDP.

Traditionally, they money are transferred through several channel between the sender and the receiver. To transfer money from Japan to the Philippines, first the sender has to make payments to a money transfer operator, like SBI Remit or Western Union, in Japan. The company will make a SWIFT transfer the money to another MTO in the Philippines through the bank. The transfer usually takes 2-3 days and when the money is received, the beneficiary MTO then distributes the money to the receiving party. The drawback of this method is obviously the long wait between sending and receiving the money. The receiver might need the fund immediately for a medical emergency or other basic necessities, so transfer speed improvements are necessary.

To improve transfer speed, money transfer company have been using a solution called pre-funding. Essentially, a sum of money is deposited ahead of time in the beneficiary MTO. Whenever the sending MTO issues a transfer, the beneficiary MTO will immediately withdraws the money from the pool and distributes it to the receiving party. The actual money will then be sent through SWIFT transfer. For the customer, this is a big improvement because they do not have to wait 3 days to receive the money. However, this creates a huge opportunity cost for the MTO, as they have a lot of locked capital that just sits unused at all times.

Ripple On-Demand Liquidity

From the two traditional remittance process, it is apparent that the bottleneck is the long duration of money transfer through traditional bank. Ripple seeks to solve this problem by providing on-demand liquidity (ODL) service using the XRP Ledger blockchain to transfer money across borders quickly and securely. 

Using the ODL, the sender will make payments to an MTO. The MTO will send the money to a digital currency exchange to convert the local currency, for example Japanese yen, into XRP. The XRP will then be sent into the digital currency exchange in the beneficiary countries in as little as three seconds, where it will be immediately converted into the local currencies. The beneficiary MTO will then distributes the money to the receiving party.

Ripple’s ODL service provide a fast and low-cost money transfer, which is a win-win situation for all parties. Previously, the cost of remittance from Japan is more than 5%, which is among the highest in the world. When foreign workers send their hard-earned money home, every single penny counts so customers will naturally search for a cheaper alternative. With this low-cost advantage, SBI Remit and Ripple will surely capture a large share of the Japan-Philippines remittance market, which sees a 1.8 billion USD money transfer in 2020 alone.

In addition to that, the elimination of pre-funding means that SBI Remit will be able to use the previously locked capital to expand their business, market their service and improve their operation. The future looks bright for SBI Remit and Ripple in Japan.

What does this mean for XRP?

Ripple continues to grow and collaborate with biggest financial institutions like Santander, Bank of America, and many others around the world to provide quick low-cost international money transfer. ODL have previously been available in Australia, Mexico, South Korea, and many other countries. Hundreds of financial institutions have also signed to use the RippleNet network for transactions. This shows that Ripple has gained its deserving place in the finance world and will continue to grow in significance.

While the news of SBI Remit collaboration caused a 15% rally in XRP price, bear in mind that Ripple business does not always correlate to XRP price. Ripple’s Q1 2021 reports showed a staggering 100% increase in ODL related sales compared to Q4 2020 at 150 million USD. However, the total exchange volume in the same quarter was 200 billion USD across various exchanges. This puts Ripple sales at only 0.07% of the total XRP trading volume. Ripple business provides constant demand for XRP, but the overall crypto market sentiments and bitcoin price still has a bigger impact on XRP price.

Still, this does not mean that Ripple activities are irrelevant. After all, one of the drivers of market sentiments are news, as shown on the XRP price rally. The more important influence of Ripple’s growth, however, is the continued relevance of XRP in the crypto world. Many crypto assets have died over time, mostly due to the nonexistence of real use case. XRP have been consistent as one of the top cryptocurrencies since its inception, partly due to Ripple activities. As Ripple continues to penetrate the global financial market, so will XRP continue to hold its relevance and retain its values as a long-term investment.

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