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Nostro accounts are both the backbone and the bane of international banking. They are the providers of liquidity; accounts that large financial institutions hold in local market currencies on each side of a transaction to facilitate a payment. Without them, international payments would slow to a crawl.
However, nostro accounts tie up hundreds of millions of dollars that could be used for investment, lending or dozens of other more productive purposes. They create capital inefficiencies for an institution, add costs, and increase risks from counterparty and currency exchange fluctuations.
Before an institution can deliver a faster, lower cost and more modern international transaction experience, they must first address their liquidity needs. RippleNet efficiently solves these liquidity pain points for financial providers and banks using flexible solutions that address various types of liquidity provisioning. Through its global payments network, RippleNet supports three types of liquidity arrangements:
- Traditional bank-to-bank fiat relationships, also known as nostro accounts. This arrangement is supported because it can be optimal for high volume transaction corridors and uses existing bank-to-bank relationships and accounts.
- Third party fiat relationships. This allows banks to prioritize those nostro accounts that make the most sense for them, but then augment them with third party relationships that can overcome the high cost of liquidity in more expensive corridors. Banks can keep the nostro accounts they want and rely on this third party to handle their medium and lesser volume transaction corridors.
- The digital asset XRP. Financial institutions can use XRP and its inherent benefits of speed, scalability and low cost to expand reach into exotic or lower volume corridors without holding new or additional nostro accounts. XRP becomes an on-demand liquidity pool for transaction parties.
With RippleNet’s pathfinding capabilities, financial institutions can even link together multiple liquidity arraignments within the same transaction to optimize their transaction networks. The addition of XRP as a digital asset helps them be more efficient with their overall capital by funding fewer nostro accounts, lowering costs through atomic processing, and reducing risk through real time settlement and lower counterparty exposure.
This use of digital assets for liquidity purposes has proven time and money savings for providers. Pilots in the crucial U.S. to Mexico remittance corridor using XRP as a digital asset demonstrated savings of 40-70% compared to traditional costs. At the same time, it helped lower settlement times from two to three days to just over two minutes.
By solving for global liquidity needs, RippleNet allows banks and providers to focus on the speed and cost of international transactions as an end customer benefit. Ultimately, it will help unlock the full potential of the coming Internet of Value.
For more information on Ripple’s solutions or to learn how to join RippleNet contact us.
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