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The inefficient management of global liquidity has long been a hurdle for cross-border payments in all regions across the world. However, this problem is particularly prominent in the Association of South Eastern Asian Nations (ASEAN) region, which has been largely underserved by correspondent banking. As a result, cross-border payments into these countries are inefficient and racked with high fees.
Starting today, Siam Commercial Bank (SCB) will be the first financial institution on RippleNet to pioneer a key feature called “multi-hop”, which allows them to settle frictionless payments on behalf of other financial institutions on the network. This eliminates the need for a direct one-to-one connection (or bilateral relationship) between financial institutions to settle a payment. Using multi-hop, SCB will be able to receive and forward on a payment without a bilateral relationship between the originator and beneficiary institutions.
A lack of a standard integration in ASEAN for regional cross-border payments currently requires expensive work arounds. Neighboring countries relying on the correspondent banking system have to first convert currency into U.S. dollars, then settle across multiple correspondent banks before finally being exchanged to the currency used at the beneficiary institution. This cumbersome process requires numerous fees, including two sets of foreign exchange. As a result, there is little to no support for the low-value payments that small to medium enterprises (SMEs) and remitters need to make.
With multi-hop, financial institutions can connect directly to SCB, which can settle and payout across the region without exchanging currencies multiple times and adding heavy fees. The result is a seamless payments experience into and out of the ASEAN region. For smaller financial institutions which previously did not have the ability to make payments into ASEAN, multi-hop will democratize access to those countries and make payments easier, regardless of payment size or their financial institution’s pool of liquidity.
The benefits of multi-hop go well beyond the financial institutions themselves. Now, the customers of RippleNet institutions, including remitters and SMEs, will see their payments settle faster, cheaper and more transparently. SMEs are estimated to be responsible for up to 60 percent of employment in the developing world, but that number is thought to be as high as 70 percent in ASEAN countries.
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