- 1 Not The Right Time To Buy Bank Of America Stock
- 2 First Bank of the United States.
- 3 Why Bank of America Merrill Lynch?
- 3.1 Introducing Bank of America Merrill Lynch
- 3.1.1 How would you introduce Bank of America Merrill Lynch to students?
- 3.1.2 Where and when did Bank of America Merrill Lynch start life, and what would you say are the key milestones in its history?
- 3.1.3 What are the main areas of Bank of America Merrill Lynch's business today?
- 3.1.4 What makes Bank of America Merrill Lynch stand out as a graduate employer in financial services?
- 3.1.5 Why did you choose to work for Bank of America Merrill Lynch and what keeps you there?
- 3.1.6 Can you give a surprising fact about Bank of America Merrill Lynch?
- 3.1 Introducing Bank of America Merrill Lynch
- 4 Bank of America is going big on blockchain
- 5 Inside Ripple's plan to make money move as fast as information
Not The Right Time To Buy Bank Of America Stock
Bank of America (NYSE:BAC) stock is down almost 3% (now trading at around $14.35) since the poor US jobs numbers were reported last Friday. In fact, the stock almost went down a full $1 after the announcement which illustrated again how this financial company is far more sensitive to changes in interest rate policy compared to the general financial ETF Financial Select Sector SPDR ETF (NYSEMKT:XLF) for example. One of the metrics I watch closely in the financial sector is the respective company's return on equity which came in at 3.8% last quarter for Bank of America, which was a full 1.1% lower than the quarter of 12 months prior.
Even if we take restructuring into account, the bank's ROE still didn't even surpass 8% which is worrying from an investors standpoint. Why? Well if the Fed stands pat on its interest rate policy, the bank will have to keep cutting costs and capex to improve its profitability which could become a hindrance over the long term. Why? Well, other banks may be able to take advantage of market conditions when rates really do rise meaningfully because of less deep cuts than the likes of Bank of America has been doing.
Bank Of America Too Sensitive To Interest Rates
Bank Of America's current CEO Brian Moynihan stated recently in an interview that a 100 basis point change in interest rates would result in an extra $6 billion being added to its net interest income metric. A hike by the Fed would do wonders for the bank's return on assets metric which again came in at a poor 0.5% in the first quarter. This is the problem a large loan portfolio of $900 billion+ (net interest income makes up almost 50% of its total income) creates for a bank in a low interest rate environment. This is why this bank is extremely sensitive to the health of the US economy. If one is long the US, then being long Bank of America makes sense. However, I just can't see margins and subsequently earnings improve (see below) until interest rates rise meaningfully.
Equity Markets Due To Decline At Any Time Now
The second reason why I don't like Bank of America at present is because I feel the S&P-500 is setting up for a hard top here and if economic numbers continue to deteriorate in the US, then banks could easily lead the decline into an intermediate low. Since the S&P-500 bottomed in mid February, banks have been leading the charge and BAC has actually outperformed the financial ETF (NYSE:XLF) and the S&P-500 (see chart) but i think that is all going to change.
Why? Well, remember that the Fed's initial projection was to raise interest rates 4 times in 2016 but now I believe it will be lucky to do it even once. Furthermore, the S&P500 took out its November highs yesterday and now I believe its only a matter of time before the index tests its all time high. However, I can't see the S&P500 breaking through its all time highs on its first attempt. Moreover, the stock market is due an intermediate decline at this point as we are 17 weeks into this intermediate cycle. Normally these cycles last 22 to 25 weeks so a gradual correction of 5 to 7 weeks looks probable to me at this stage and the leveraged nature of financials means this sector could easily lead the market down into an intermediate low over the near term.
Therefore, I would caution investors who are sizing up Bank Of America as a strong value play at these levels. Yes, everything on the surface stacks up. Bank Of America 's present book value per share is $23.21 and although net interest margins continue to decline, the bank still brought in $15.47 billion in net income last year. However, I believe the risk is very much to the downside with this stock as its present price to book ratio of 0.64 reflects the poor profitability it is currently achieving compared to the likes of Wells Fargo (NYSE:WFC) in this space. Caution is definitely warranted at present.
To sum up, now that an interest rate hike is firmly off the table for June, I believe Bank of America at very best will trade in a range for the rest of the year. The bank is over-sensitive to interest rate movement due to its large loan book which is stifling its profitability. Furthermore, its profitability is nowhere near the likes of Wells Fargo ( Which has trailing ROE & ROA averages of 12.4% and 1.18% currently) which is why I still believe its a speculative investment at best here. Moreover, watch the S&P500 as it is due a correction at any time which would undoubtedly apply pressure on Bank Of America stock.
First Bank of the United States.
Alexander Hamilton, the first Secretary of the Treasury, was a great admirer of England, and all her institutions. He knew the close and intimate connection between the Bank of England and the British Treasury; and he was well acquainted with the important aid which his friend Morris had derived, while acting as Superintendent of Finance, from the Bank of North America.
Congress at its first session, under the federal constitution, was occupied with providing a public revenue, and funding the public debt. At the second session, Mr Hamilton brought forward his plan for a Bank of the United States.
It was proposed that the capital of this Bank should be ten millions of dollars, one fifth to be taken by the United States. The remainder was to be divided among individual subscribers, who were to be allowed to pay three fourths of their subscriptions, in certificates of the funded
debt; the other fourth to be paid in specie. The notes of the Bank were to be received in payment of all public dues; it was to have the keeping of the public treasure; and Congress was to grant no other bank during its continuance.
The advantages to be derived from this Bank were as follows: First, the credit and value which it would impart to the government stocks by absorbing eight millions of that property. Second, the great convenience which such a bank would be to the treasury, in the collection and expenditure of the public revenue, and the management of the public debt. Third, the facilities and accommodation which it would furnish, in the way of loans, to merchants and others.
The proposed Bank was vehemently opposed on the following grounds. First, that banking institutions in general, and this Bank among the rest, were the artful contrivances of cunning men, to grow rich at the expense of the people. Second, that the Bank would tend to strengthen the executive branch of the government, already too strong, by allying with it the interest and influence of the monied men. Third, that such a charter was unconstitutional.
Touching these reasons, pro and con, it may be observed, that the first and second reasons in favor of the Bank, were substantial so far as they went, and were therefore entitled to a certain degree of weight.
The third reason for the Bank, and the first reason against it, involved a great question of political economy, not well understood by either party, and which will be fully discussed in the second part of this treatise. This question was doubtless much the most important and interest ing part of the whole controversy; but as if the members were conscious how little they understood it, it was far from being made the turning point. An assembly of lawyers rather chose to rest the decision upon legal quibbles and verbal subtilties, at which many of them were sufficiently adroit.
Accordingly, the discussion finally settled down upon the constitutional question, the third reason against the Bank. That question has nothing to do with the theory of banking. Let the lawyers and politicians settle it if they can, I will only observe that the letter of the constitution is on one side; while there is arrayed upon the other, the practice of all political parties, the acts of every administration, the doings of every Congress, the solemn decisions of the Supreme Court, and the opinions of every leading statesman, with the single exception of Mr Jefferson.
The question of granting a charter was decided by a very close vote.
The History of Banks/31
The First Bank of the United States went into operation, and presently fulfilled many of the promises of its friends, and some of the predictions of its opponents. Government stocks soon rose to par; and the sales made in Europe furnished the country with a monied capital which was much needed. The facilities which the Bank afforded to the treasury department, were undeniable; but it was also observed that the stockholders in the Bank soon became the most firm and unflinching supporters of the executive, and of Mr Hamilton, by whose advice executive measures were principally guided.
It is highly unfortunate for the advocates of a strict monopoly, that the right of granting bank charters is claimed and exercised, not only by Congress, but by the state legislatures; and as the democratical spirit of equal rights has always been more lively in the state legislatures, than in Congress, no state bank has ever been able to obtain a grant of exclusive privileges analogous to those which have always been looked upon as the proudest feather in the cap of our National Banks.
The establishment and success of the First Bank of the United States gave a new impulse to the business of banking. That same year, the Maryland Bank went into operation at Baltimore, with a capital of $300,000; and the next year, the Providence Sank was chartered by Rhode Island, with a capital of $400,000. In 1792, eight new state banks were created; and by the year 1810, the number of banks in the United States amounted to upwards of eighty, with an aggregate capital of about fifty millions of dollars.
The First Bank of the United States, in its very origin, was a party institution. It had been sustained by the friends and followers of Hamilton; and as zealously opposed by the adherents of Jefferson. So long as the party of Hamilton remained in power, the concert between the bank and the government was perfect; but after the access of Jefferson to the office of President, the government entertained one set of political opinions, and the Bank Directors, another.
The natural consequences of this state of things were fully developed, when the time for the expiration of the charter began to approach. It is obvious, that if a National Bank is a good thing, the same Bank, unless its stockholders or their agents, have been convicted of some fraud or misbehavior, ought to be rechartered from time to time, and kept in constant operation. The winding up of one Bank, and the putting another at work, however agreeable and advantageous such an operation may be, to stockbrokers and stock-gamblers, is advantageous to
them alone. To the public it is highly inconvenient. And this is a fresh proof of the disadvantage of having banking operations at all dependant upon legislative bodies, whose decisions are always more or less guided by a mere spirit of party.
The First Bank of the United States had proved, in practice, highly convenient to the treasury department; and Mr Gallatin, the Secretary of the Treasury, was favorable to its recharter upon that ground. A large proportion of the original opposers of the Bank, had ceased to feel that vehement dislike towards all banking institutions which they had evinced in 1790. Many of them had become officers or stockholders in the state banks; and others were in the habit of receiving business accommodations from the Bank of the United States which they were unwilling to lose. Hence there were found many unexpected advocates in favor of extending the charter. But then the Bank was in the hands of federalists, an argument against it, alike cogent with the most knowing and the most ignorant. It was this fact which prevented its re-charter, the bill being thrown out by a very close vote. The admirers and advocates of national banks, with the usual logic of practical men, have ascribed all the disturbances in the currency, which took place subsequently to the winding up of the First Bank of the United States, to the non-existence of a national bank. These things followed the winding up of the Bank, therefore they were produced by it. This is a remarkably easy and convenient method of proof; but it cannot be implicitly relied upon; since things are often connected in point of time, which have no connection whatever in point of fact. We shall presently see to what those disturbances in the currency were owing. In the mean time I will only remark, that it was fortunate for the honor of the First Bank of the United States, that, by ceasing to exist, it escaped being exposed to temptations, which were found too strong for the honesty of other institutions, equally respectable in point of character with the National Bank.
State Banks. Stoppage of Specie Payments.
The deficiency in the amount of bank capital and bank accommodations, apprehended from the winding up of the National Bank was more than supplied by the new state banks which sprung up in consequence of its destruction. In the three years, 1810, 1811, 1812, forty-one new state banks were chartered, with an aggregate capital of some thirty-six millions; so that about the commencement of the war with Great Britain,
The History of Banks/33
the total number of banks in the United States was upwards of one hundred and twenty, and the aggregate bank capital, a part of which, however, was only nominal, about seventy-six millions.
The government, out of tenderness for the people, or a tender regard for their own popularity, perhaps a mixture of both, had resolved to carry on the war without the imposition of taxes. They relied upon loans. But the loan-market of Europe was shut against them; and at home, a large proportion of the monied men were opposed to the war, and not well inclined to furnish the means of carrying it on. The government were obliged to tempt borrowers by the offer of very advantageous terms; and as the war went on, and their necessities increased, the terms they offered became still more favorable. Even the most tempting offers proved no match for the political prejudices of Eastern capitalists, a most striking proof that avarice is a passion less strong than hate. But in the Middle and Southern states, where the war was popular, those who had money or could command it, were pushed by the double impulse of patriotism and interest, to subscribe to the government loans. In some cases, the banks themselves became the lenders; in most others, they lent to the individuals, who lent to the government. Things went on in this way till the middle of 1814. The government was then in the greatest distress for money, and more clamorous than ever, for loans. But the banks had already gone to the utmost limit of their means; their capitals were all invested; they had put more notes into circulation than they could keep there; and provided they continued to redeem those notes, that is, to pay their own debts, it would be impossible for them to lend the government any more money, or to enable individuals to lend it.
Examples of successful fraud seldom lack imitators. In this exigency, the bank directors bethought themselves of what the Bank of England had done and was still doing. They well knew how profitable a speculation it had proved to that Bank; it was suggested among them, and the resolution was presently adopted, to suspend specie payments.
To carry this scheme into successful operation, it was necessary first to secure the tacit approbation of the government; for if the government would consent to go on receiving their notes in payment of all public dues, it would give them a credit, which would sustain their circulation. The government were at the mercy of the banks. Overwhelmed with financial distresses brought upon them by their own neglect to provide sufficient pecuniary means for carrying on the war, they had no power to refuse; for if the banks did not supply them with money where
were they to get it?
Accordingly the government gave a tacit consent; and by a compact among the bank directors, the suspension of specie payments took place simultaneously, or nearly so, throughout the middle, southern and western states.
This suspension of specie payments did not extend to New England. The bank directors there, did not choose to become parties to this scheme for enriching themselves, and assisting the government, at the expense of honesty and their creditors; nor would the people, a majority of whom were opposed to the war, ever have submitted to so outrageous an imposition. But south and west of New England, every bank in the country became a party to this fraud, with the sole exception of the Bank of Nashville, the sturdy honesty of whose directors, amid such general knavery, is not less praiseworthy than it is remarkable.
The suspension, it was said, was to continue only during the war. Peace came in five months; but the banks gave not the slightest indication of any desire to return to honest courses. The people, not well acquainted with the subject, purposely puzzled and misled by the specious arguments of the bank directors, and deceived by the apparent prosperity of business, under this new system of banking, did not move in the matter. As to the government, they Were still involved in the deepest financial embarrassment. The treasury overflowed with unconvertible bank paper; but they experienced the greatest difficulty in meeting the heavy demands which fell due in the eastern states, where nothing would be accepted in payment, except specie or notes equivalent to specie.
The banks therefore went on to suit themselves; and the years 1815, 1816, may be well marked in the calendar, as the jubilee of swindlers, and the Saturnalia of non-speciepaying banks. Throughout the whole country, New England excepted, it required no capital to set up a bank. All that was wanted was a charter; and influential politicians easily obtained charters from the blind party confidence, or interested votes of the state legislatures. A whole batch of these banks, was created in Kentucky by a single act; and other states did the same thing.
These banks, all through the country, immediately commenced lending their paper to all who could give any tolerable security. This over issue of notes, soon produced a depreciation. Depreciation produced a rise in prices; the apparent value of all kinds of property suddenly went up, and the people imagined they were never growing rich so fast. Business and all kinds of speculation were uncommonly brisk; the dividends
Why Bank of America Merrill Lynch?
The key facts about top graduate employer Bank of America Merrill Lynch, plus insights from a senior figure at the organisation
In association with
A bulge bracket investment bank
Introducing Bank of America Merrill Lynch
Marc Tempelman is co-head of Corporate Banking and Debt Capital Markets for EMEA at Bank of America Merrill Lynch. He joined the firm in 1997 as an associate and has since held a number of senior positions in London, Paris and New York. Here, Marc answers some key questions about Bank of America Merrill Lynch.
Bank of America Merrill Lynch in a sentence: Bank of America Merrill Lynch is the global banking and markets arm of the wider Bank of America financial services group, providing banking and capital markets solutions to clients worldwide.
Industry: Financial services
Type of organisation: Public company
Headquarters: Headquartered in Charlotte with major presence in New York, London, Hong Kong, Tokyo, Singapore and Sydney
Opportunities for graduates: Graduate and internship schemes across 12 business lines, including Global Corporate & Investment Banking, Global Markets & Research, Global Transaction Services, Global Loan Products, Risk, Technology, Compliance, Corporate Audit and Quantitative Management.
Graduate positions for 2015: Over 400 analyst and associate positions across Europe, the Middle East and Africa (EMEA) internship and full time programmes.
How would you introduce Bank of America Merrill Lynch to students?
Bank of America Merrill Lynch is a leading diversified banking organisation. Through our global operations we provide a range of client services across the full spectrum of corporate and investment banking.
Graduate recruitment is of paramount importance to everyone at the firm, including our most senior management. We are one of the largest employers of emerging talent worldwide and are fully committed to ensuring that our graduate intake is as diverse as possible.
Where and when did Bank of America Merrill Lynch start life, and what would you say are the key milestones in its history?
Bank of America Merrill Lynch came into existence at the beginning of 2009, following the merger between financial services firm Bank of America and investment banking group Merrill Lynch.
In 2014, five years into our existence as a merged organisation, we were recognised by Euromoney as the world’s number one investment bank and as the leading global transaction services house. It was the first time in history that a bank had been presented with both awards in the same year, which underscores the power of our integrated corporate and investment banking business.
In 2013, Bank of America Merrill Lynch also ranked as the world’s number one investment bank in terms of overall revenues according to the industry’s leading data provider, Dealogic.
What are the main areas of Bank of America Merrill Lynch's business today?
The organisation comprises core service offerings across Global Corporate & Investment Banking and Global Markets.
Our Investment Banking division serves large institutions and corporations, governments and sovereign entities. Core services include mergers and acquisitions (M&A), leveraged finance, and services for financial sponsors such as private equity firms.
Our Corporate Banking division supports both medium-size businesses and large institutions and corporations. Key services include lending, treasury services, debt and equity capital markets and advisory services.
The Global Markets division provides companies and institutions with sales and trading solutions in a number of areas, including debt, equity, foreign exchange and commodities.
What makes Bank of America Merrill Lynch stand out as a graduate employer in financial services?
We’re part of a small group of multi-product banking organisations offering a combination of investment banking and corporate banking services and, more importantly, the same high quality expertise on both sides of the business.
We are also one of very few firms in a position to offer our clients a truly global service: we have offices on three continents, serving clients in more than 90 countries. Our global reach makes us a leading provider of cross-border M&A services and other multinational business solutions.
Why did you choose to work for Bank of America Merrill Lynch and what keeps you there?
When I joined the firm as an associate 18 years ago it was purely a case of being delighted that they wanted me!
What’s kept me here since then is the simple fact that all the things that were offered to me when I first joined have actually come true. I wanted to work in an environment that was fast-paced, where opportunities for promotion – provided I worked hard and met the firm’s goals – would come quickly to me, and where I would be able to pursue an international career.
After beginning my career in London, I’ve managed teams in New York, and also worked in Paris. I’ve seen many of my colleagues follow a comparable path and enjoy similar opportunities.
Can you give a surprising fact about Bank of America Merrill Lynch?
We have an active volunteering programme and last year alone Bank of America Merrill Lynch employees in the UK volunteered over 35,000 hours of their time to good causes.
Our UK employees also contributed £1.3 million to charitable causes in 2014 through payroll donations.
Overall our firm has donated over £4.4 million to schools and organisations through grants, fundraising efforts and employee donations in the UK. We are passionate about giving back to our communities.
Bank of America is going big on blockchain
Bank of America is trying to steal a march on the latest developments in the technology behind digital currency bitcoin by loading up on blockchain-related patents.
Blockchain works like a huge, decentralized ledger for the digital currency bitcoin which records every transaction and stores this information on a global network so it cannot be tampered with.
Major financial institutions -- including the Bank of England -- have released a number of notes over the last year on the potential of the technology and have created teams within their organizations to look into how to develop the cryptocurrency.
But Bank of America is going one step further by attempting to patent some of the use cases of the technology. The company has already filed for 15 blockchain-related patents and is currently in the process of drafting another 20 to be submitted to the U.S. Patents and Trademark Office (USPTO) later this month, a spokesperson told CNBC on Wednesday.
"Blockchain's very intriguing and for us it's a balance between not wanting to be Neanderthal but not wanting to put something out in a commercial application where the commercial application is still very unclear as a technologist, the technology is fascinating," Catherine Bessant, the chief operations and technology office at Bank of America, said during a CNBC event at Davos last week.
"And we have tried to stay on the forefront, I think we have somewhere around 15 patents, most people would be surprised at Bank of America with patents in the blockchain or cryptocurrency space. (It's) very important in the intellectual property world to reserve our spot even before we know what the commercial application might be."
In December, the United States Patent and Trademark Office (USPTO) published 10 of Bank of America's applications. The USPTO publishes patent applications 18 months after they're filed. But the latest information shows that the number of patents Bank of America has filed for and is looking to apply for is much higher.
Bank of America patents published by the USPTO showed proposals for a "cryptocurrency risk detection system" and "suspicious user alert system" among others. These patents have not yet been granted.
The technology might be some years off before becoming mainstream for banks, but institutions are taking a collaborative approach to the technology, working with start-ups and even rival lenders. A consortium of more than 25 banks, led by fintech (financial technology) company R3, is currently developing a framework for applying blockchain technology to markets.
Last year, Goldman Sachs released a note that said blockchain could "change everything" while banks from Barclays to UBS explained how the technology could be used in areas from remittances to drawing up contracts.
Inside Ripple's plan to make money move as fast as information
When Brad Garlinghouse, the CEO of Ripple, has to explain to his mother, who lives in Kansas, what his company does, he says, "Mom, it's pretty simple. We sell software to banks."
But it isn't quite that simple. Most fintech startups fall into one of two camps: those that want to compete with banks and those that want to save banks from themselves. Ripple is the rare exception that wants to do both.
The San Francisco startup, which began years ago by launching a cryptocurrency but has since turned its attention to business applications for blockchain technology, can easily prove its bona fides in the second camp. The fact that 60 banks are now in the process of commercially deploying Ripple's enterprise software—among them Santander, Royal Bank of Canada and Mitsubishi UFJ Financial Group—reflects the company's incumbent-friendly approach.
"We're not the disruptors, we're not the guys who come in and tear everything down," said Stefan Thomas, Ripple's chief technology officer.
And yet the company's larger vision—to build an "internet of value," a global internetworking system for money—would be tremendously disruptive to the status quo of international banking. In this system, monetary value could flow seamlessly from a bank ledger to a public blockchain to a mobile money system—all interoperable and working together to move money from one side of the globe to the other. In the more distant future, says Thomas, such a system could expand beyond money to any form of value whatsoever.
In other words, Ripple doesn't just want to help banks make cross-border payments. It wants to make the world's assets liquid. If Ripple has its way, it will do more than knock out Swift; it will have found a way to make money move like information.
Overcoming an identity crisis
Before it can conquer the world, though, Ripple will have to sort out its branding. It is practically the only blockchain startup selling enterprise software to major banks while funding development costs with its own cryptocurrency. That more serious attention has not been paid to Ripple even by many cryptocurrency enthusiasts—and that it hasn't garnered headlines the way bitcoin and Ethereum have—may be due in part to poor nomenclature. Another reason, undoubtedly, is the series of pivots Ripple has undergone.
"They've had something of an identity crisis about who their customer is, and what problem they are trying to solve," said John Light, who has consulted for startups working with Ripple's technology.
Ripple's initial plan was to "build a better bitcoin," Garlinghouse said. Its leaders were prescient regarding issues with bitcoin's software that have now come to the fore, such as its ability to process only seven transactions per second. Ripple wanted to be able to handle transaction volume on the scale of Visa.
They also decided that so-called "bitcoin maximalists" were wrong about being able to replace incumbent banks, much less government currencies, with digital cash. Rather than rail against the status quo, they decided to work with banks to improve it.
But Ripple's cryptocurrency, XRP, hasn't gone away, which tends to muddy the picture.
"It is confusing as hell," admitted Miguel Vias, Ripple's head of XRP markets.
Vias knows from experience. After being hired last December, he made a point of going to bitcoin meetups to spread the word about Ripple and XRP. People were surprised to hear that XRP was still around, he says.
It takes a while to sort through Ripple's offerings. There is the Ripple consensus ledger, a public blockchain network tied to XRP (confusingly also called Ripple). There is an enterprise software solution that has nothing to do with digital currency but which purportedly allows banks to send cross-border payments more quickly, transparently and cheaply. (To get the full benefit, though, the banks on either side of a transaction both have to be running the software.) And there is the Interledger Protocol, which works in tandem with the enterprise software and connects ledgers of different types—a private bank ledger and a public blockchain, say—for the purpose of settling payments between them.
Gradually, Ripple is incorporating this array of products and services—formerly a public-relations liability—into a singular vision.
"They're slowly coalescing around some of these various solutions," Light said.
When approaching banks, Ripple leads with its enterprise software—"a better Swift," according to Vias—along with the Interledger Protocol. Ripple executives talk a good game about how blockchain technology disrupts the "correspondent banking paradigm," in which banks with no direct relationship rely on intermediaries in order to send payments to each other. But Ripple's current software still depends on a global network of correspondent banks.
Rather than total disruption, what it promises are faster settlements with more transparent fees.
International banking today, said Garlinghouse, has "a speed problem, a cost problem, plus an error rate problem." As cross-border payments ping-pong among correspondent banks—as many as five for a single payment—each one takes a piece of the action in the form of fees or currency-exchange charges. The initiating bank often doesn't know ahead of time what the total cost of a payment will be.
International wire transfers between banks cost from $5 to more than $50, plus foreign-exchange charges of 0.25% to 3% and "landing fees" of as much as $20. And the error rate for wire transfers is between 3% and 5%, Thomas said.
Where Swift, the Society for Worldwide Interbank Financial Telecommunication, provides a one-way messaging service, Ripple provides a two-way protocol. This allows for greater transparency: Banks can exchange information and find out ahead of time what the fees and foreign-exchange rates will be, along with the expected date of delivery for the funds. If any of the information is wrong or missing, both banks will find out before the payment is sent, which should keep transfers from getting stuck in the pipes. Once the sending bank has initiated a transaction, Ripple uses the Interledger Protocol to settle the funds and notify everyone of its successful conclusion.
"This is not a science experiment," Garlinghouse said. "This is real production systems moving real value, and we're the only player in the industry that can say that."
In April, the Spanish bank BBVA completed a series of international money transfers between Spain and Mexico using Ripple's distributed ledger technology. The transfers took mere seconds, BBVA said, as opposed to the four days it normally takes for such international transfers to clear. After the trial, Alicia Pertusa, the bank's head of digital transformation in investment banking, called it "a clear demonstration of how payment processes can be vastly improved through the implementation of emerging technologies."
This is perhaps a more diplomatic way of saying what Garlinghouse has said before, that Ripple's technology represents a race car compared to the horse and buggy of the current system.
Naturally, Swift begs to differ. For about four decades, the nonprofit consortium has had a vise grip on international bank transfers. Swift doubts that its 11,000 members are yet ready to entrust big cross-border payments to a blockchain.
The collective recently launched a service called Global Payments Innovation to clear away some of the murk in the correspondent banking system. GPI enables banks to track a payment's status in real time, just as consumers can check on their UPS or FedEx packages.
Banks are enthusiastic about GPI, and to some it may seem like a sufficient improvement over the old system. Since February, about 100 banks have signed up for GPI, and 12 of them have already used the service to send hundreds of thousands of cross-border payments around the world, according to Swift.
'Nothing happens quickly in banking'
Another criticism of distributed ledgers is that they won't catch on in the corporate world without a set of transaction rules and other standards, a la Swift, to govern activity on the network. Ripple agrees. Last September, it formed the Global Payments Steering Group, an interbank consortium whose founding members included Bank of America Merrill Lynch, Santander and Royal Bank of Canada. Its express purpose is to establish a clear framework of rights and obligations for banks using Ripple's technology.
One member of the group, MUFG, says the expansion of the network is among Ripple's biggest challenges. Ripple's 75 customers are nothing compared to Swift's 11,000. And it is harder for some banks to join up than others. CBW Bank, a small Kansas institution that has managed to become a fintech hub, wants to use Ripple's technology but is still working through the compliance requirements.
"Nothing happens quickly in banking. There are tens of thousands of banks. There is no easy way that we can connect to every one of them," said Suresh Ramamurthi, the bank's chairman and CTO. "It takes a long time to build a global network."
But there are signs of progress. In March, Ripple announced that a consortium of 47 Japanese banks had successfully completed a pilot with its enterprise software. Twelve more banks have since joined the consortium, and they are planning to deploy a commercial version of the blockchain solution at scale in October 2017. Ripple's software is now touching 40% of customer banking accounts in Japan, Garlinghouse said.
Although Ripple is signing up as many banks as it can for its messaging software—its customers include the largest bank in Turkey and the national bank of Abu Dhabi—it is emphatically not trying to persuade them to entrust all of their payments to Ripple's own ledger. To do so would lead to a "Mexican standoff," said Thomas, because nobody wants to give up their preferred ledger.
That's where the Interledger Protocol comes in. In May, Ripple completed a test in which the company sent ether—the native coin of the Ethereum network—to the Ripple consensus ledger; the ether was received as XRP in a Ripple wallet. It was therefore "both a cross-ledger and a cross-currency transfer," Thomas said.
At the Blockchain Expo in Berlin recently, Ripple went even further, presenting a demo of a payment that had crossed seven different ledgers, and held a hackathon in which representatives from Ethereum, the privacy-focused cryptocurrency Zcash and other projects worked to enable Interledger Protocol payments on their ledgers.
"There isn't going to be one ledger to rule them all," Garlinghouse said. "It's about how do you enable interoperability between ledgers."
A return to cryptocurrency
One of those ledgers, of course, is XRP's. Even as Ripple has signed up dozens of banks for its enterprise software, it has been working to bring XRP back into the conversation. You could say it is pivoting back to cryptocurrency just as it once pivoted away from it.
XRP is today the world's third-largest digital currency by market capitalization, and it has delighted speculators in recent weeks. For a long time, two of the biggest concerns about XRP have been the network's centralization—with Ripple itself being the primary validator of transactions—and the startup's huge hoard of XRP, basically a mountain of digital gold on which Ripple has crouched, Smaug-like, and which it has sold off piecemeal to finance development. In addition to paying its developers, Ripple doles out XRP as incentives to market makers and sells it to institutional investors.
For the past year and a half, Ripple has sold an average of 300 million XRP each month. But concerns lingered that the company could dump much more, making it a bad bet for investors.
In mid-May, Garlinghouse announced a solution. Ripple, he wrote, was going to place 55 billion of the nearly 62 billion XRP it owns into escrow by the end of the year. Technically, there will be 55 lockup agreements of 1 billion XRP each; a contract will expire on the first day of every month, providing Ripple with operating funds. Whatever hasn't been spent at the end of the month will be put into a new escrow account at the back of the queue.
By cryptographically freezing so many of the company's assets, Ripple will place a hard limit on the number of XRP that can enter the market at any given time.
"The lockup provides a level of predictability about XRP supply that is favorable for market demand," Spencer Bogart, the head of research at Blockchain Capital, an investor in the company, said in a statement published by Ripple.
The price of XRP had already been climbing before the announcement. The next day, it hit $0.42, about eight times what it had been at the start of the month. (Even after a retrenchment, XRP's market cap is still about $10 billion, behind only bitcoin's and Ether's.)
The price spike has prompted new exchanges to support XRP trading. As Ripple brings them on board, the exchanges tend to become validators on the XRP network, decentralizing a job that Ripple once performed alone.
Vias acknowledges that some of XRP's recent price increase is due to larger forces. An intense bull market has seen the total value of all cryptocurrencies rise to a level about six times what it was in January 2017.
"But I think the fact that we attacked those two fundamental structural issues allowed XRP to participate in the [broader] rally in a way that it might not have otherwise," he said.
So why should banks care? Because Ripple plans to use XRP to solve their liquidity problems.
As it stands, banks around the world must hold billions of dollars in reserve, waiting to use them for payments. When one bank needs to send money across borders, it uses the dead cash it is holding at the foreign institution to which it is sending funds—either the final recipient or the intermediary correspondent bank. The whole process involves counterparty risk and the expensive vetting procedures that go along with it. This dormant cash is all the more wasteful because, in a world of Basel III, it counts as yet another balance-sheet asset against which a bank has to hold cash to cover its liabilities.
Ripple's big idea is to use XRP—once its market cap gets high enough and it is being traded heavily enough—to provide banks with liquidity on demand. During a transaction, a fiat currency like the U.S. dollar would be converted by market makers into XRP and almost instantly swapped back into another fiat currency, like British pounds, on the other side.
XRP is perfect for this, company executives say, because the average transaction costs a mere $0.0003, or three one-hundredths of a penny, and is confirmed within two or three seconds. The Ripple ledger can process more than 1,000 transactions per second. There is even a feature that would allow two parties to set up a direct conduit and send money back and forth at much greater speeds—increasing the network's processing limit to 50,000 transactions per second, Vias said.
When preparing to send money, the bank would get a single quote for the foreign-exchange cost. Everything else, the actual sausage-making, would be abstracted away. This, according to Thomas, is the new frontier, "trying to get banks to use digital assets for settlement."
"Ripple is definitely thinking about this the right way," said Whitman Knapp, chairman of the transaction banking advisory firm GTBInsights, regarding Ripple's plan to use cryptocurrency for cross-border payments.
While Vias admits he can't even begin to have this conversation with banks until XRP itself is more liquid, Thomas is already thinking about the end result in magical terms. Banks, he said, will have "gold that you can teleport into any vault in the world instantly."
One real step toward this payments utopia came last year, when Ripple collaborated with the technology consortium R3 on a project in which 12 banks used XRP to settle transactions with each other in real time. The payments were made in a test environment; it was all house money. But Vias calls it a success.
"We got 12 banks to hold a digital asset for the first time ever," he said. "I think it was a real show of faith from them."
Thomas says that Ripple is now seeing a lot of interest from banks in XRP. The next step is to do a real pilot involving XRP settlements, though Thomas said the company has nothing yet to announce on that front.
There are plenty of hurdles left to clear before high finance can ever do away with correspondent banking. Regulators will want to have their say about any new system.
"Digital currency brings a different set of compliance [requirements], and if you're trying to pioneer that, you're bearing the brunt of all the questions from the regulators," said Ramamurthi.
For now, Ripple is trying to play a sort of three-dimensional chess, selling banks on software even while working hard to transcend that software. This type of development goes beyond the iterative process with which Silicon Valley and Wall Street alike have become familiar. That process involves releasing an early version of an app or feature—a so-called minimum viable product—and then steadily improving it in later versions. Ripple's approach looks more like an overlapping chain of innovations.
"In the most elegant end-state of our solution, Ripple, ILP and XRP work seamlessly together," Vias said.
Ripple is not yet a world-beating company, which is to say that most banks, while excited about blockchain technology, haven't yet decided just whose blockchain, or chains, they are going to use. BBVA, for instance, is engaged in several pilots with the technology, including one involving syndicated loans as a member of R3. It also belongs to the Ethereum Enterprise Alliance and Hyperledger.
An MUFG representative said the Japanese megabank is still pursuing a previously disclosed project with Coinbase, a leading bitcoin startup, to use the cryptocurrency for cross-border payments.
"Our intent is not to compare or have these services 'compete' with each other," the representative said. "Because we do not believe there is a 'one and only' payment method, we are reviewing other payment systems. MUFG believes in offering options for our customers, so they can choose."
As for Ripple’s technology, MUFG has "finished the experimentation phase and [is] moving toward pilot/production testing this year."
Even Swift is adapting to the new landscape. In April, the cooperative announced that it was developing a blockchain proof of concept for the real-time reconciliation of nostro accounts used in cross-border payments. Wells Fargo, Bank of New York Mellon, BNP Paribas and a number of other financial institutions are taking part. (To build the proof of concept, Swift is relying on Fabric, an open-source blockchain framework incubated by Hyperledger.)
To succeed, Ripple will need "to be laser-focused on what problem they're solving, because there's a lot of competition in this space, and you can't solve all of everybody's problems," Light said. "They have competition from R3, from traditional fintech companies, even from some of the bitcoin-based enterprise software companies, so they're going to need to keep their offering competitive."
Even in this chaotic space, however, there are some signs that Ripple is emerging as a front-runner. Seventy-five organizations, including dozens of banks, are now Ripple customers. In March, the startup poached a Swift executive. And when Santander dropped out of R3 in November 2016—one of several banks to do so over the past several months—it took care to reaffirm its commitment to a couple of other blockchain projects. One of them was the Global Payments Steering Group.
In recent conversations, Ripple's leaders were as sanguine about the competition as they were bullish on blockchain technology as a whole.
"I don't knock bitcoin, I don't knock Ethereum, I don't knock anybody," Vias said. "Everybody is out here trying to make transformational leaps forward, and I think we're all going to be better off for it."