Cross-border blockchain payments company Ripple got some bad press the other day as Western Union CEO Hikmet Ersek said he hasn’t seen any cost savings from piloting its xRapid service, which uses its proprietary XRP cryptocurrency to bridge between different fiat currencies, avoiding the costs of correspondent banking networks. According to an interview in Fortune, Ersek complained:
“We are always criticized that Western Union is not cost-efficient, blah blah blah, but we did not see that part of the efficiency yet during our tests,” Ersek told Fortune in an interview Wednesday at the Economic Club of New York.
“The practical matter is it’s still too expensive,” Ersek added, noting that Western Union would only be interested in adopting XRP for payments if it proved that it could lower the company’s costs.
Ripple responded:
Indeed, Western Union has sent just 10 payments using xRapid to date—far too few to reap significant results, according to Asheesh Birla, Ripple’s senior vice president of product. Although the experimental phase is about six months along, it took much of that period for Western Union to lay the internal groundwork and allocate resources for the tests, “so the actual pilot was only a matter of a week or two,” Birla explained.
“If they were to move volume at scale, then maybe you would see something, but with 10, it’s not surprising that they’re not seeing cost savings,” Birla said. “They do millions of transactions a month, and I’m not surprised that with 10 transactions it didn’t have earth-shattering results.”
So why would Ersek go public with his complaints now, when by his own admission the company is still working with Ripple, and he doesn’t want to stop? Perhaps he is trying to put pressure on Ripple to sweeten the deal, but it also seems that he feels criticisms of Western Union’s pricing are unfair. Indeed, much of the value of Western Union is in its extensive agent network – something that no cryptocurrency is going to replace. Also, Western Union has the volume to secure favorable pricing from global banks, so it is not the ideal client for Ripple – in fact, one could argue that Western Union and Ripple are natural enemies, since if Ripple succeeds, it could enable traditional financial institutions to compete with Western Union for lucrative cross-border payments.
This highlights an inherent tension confronted by legacy financial firms who partner with fintechs in an effort to avoid, or at least benefit from, disruptive technology. There is no guarantee that a firm can adapt successfully, even when it owns the technology in question: see the example of Kodak, which actually invented the digital camera, but did little with it beyond patent licensing (which, too be fair, earned billions for the company). Change is hard, and disruptive innovations often function poorly in their early stage of development, making it even harder for evangelists to sell incumbents on the need for change. History reveals, however, that giving up too soon is a common pitfall, and that innovation doesn’t work according to normal business timeframes.
Overview by Aaron McPherson,VP Research Operations at Mercator Advisory Group