The Ripple Labs Partnership Offer Value to MoneyGram in Terms of Cost Reduction in Q4 and Q1 2020

  • We can expect to see higher EBITDA in the next quarter (Q4) and in Q1 of 2020
  • RippleNet reduces MGI’s SWIFT communication costs
  • XRP can cut transaction cost by 40% to 60% and reduce transaction time to 2 to 3 seconds

Ripple Lab’s Background and Product Offering

Ripple Labs was founded in 2012 as Opencoin. The company renamed itself Ripple Labs in 2015. The company sells banking software and cloud solutions that utilize blockchain. Until recently, the company offered three main products to customers:

xCurrent: A money transfer network designed for quick payment processing. The software functions as a communication and settlement tool. xCurrent validates payment information and release committed funds simultaneously for all parties. 

xRapid: A software that utilizes XRP in money transfer services, providing more liquidity and instant settlement. For example, the sender can exchange the U.S dollar for XRP, then immediately exchange XRP for the European Euro.

xVia: The interface helps send payments. The system tracks payments, free up cash, and gives the users more data.

In October 2019, Ripple rebranded its product offering. Per the Ripple website, xCurrent and xVia are combined as RippleNet. RippleNet allows customers to process and send payments efficiently. Additionally, RippleNet customers can, if they desire, use On-demand Liquidity (ODL), formerly called xRapid, on the RippleNet platform.

In a Morningstar interview, Brad Garlinghouse, the Ripple CEO, confirms that customers can now connect to RippleNet via the cloud and use On-demand Liquidity (ODL). Essentially, all previous products are packed into RippleNet.  

“Rather than purchasing xCurrent or xVia, customers connect to RippleNet via on-premises or the cloud, and instead of purchasing xRapid, customers use on-demand liquidity.”

Ripple Lab’s New Expansion Plan

“Why build cars when you can build roads”

I believe the company shifted its focus from offering software to building a global blockchain infrastructure, facilitating digital currency use. For example, 41% of Ripple headquarters are located in Asia, followed by Europe (16%) and America (15%). Additionally, the company is giving customers access to ODL whenever RippleNet is purchased, facilitating the ultimate goal of expanding XRP use.

More importantly, the company needs to prove to the world that RippleNet can truly impact business operations, decreasing cost and generating liquidity. In June 2019, the company’s purchased 10% of MoneyGram (MGI) under the condition that RippleNet and XRP be used by MoneyGram to facilitate money transfer, which accounts for 88% of MGI’s revenue in 2018.

RippleNet Decreases MGI’s reliance on SWIFT

RippleNet allows MGI to perform real-time communication with its partner banks.  

Traditionally, MGI relied on the Society for Worldwide Interbank Financial Telecommunication (SWIFT) for direct communication between global banks during a money transfer. From its press release, MoneyGram officially joined the cooperative in 2011.

Per the SWIFT website, The cooperative, owned by banks, offers a network allowing direct communication among partner banks. Simply put, it is a messaging network. Each money transfer is tagged with a SWIFT number. SWIFT makes money from charging for each message.

By implanting RippleNet, MGI can reduce SWIFT fees when possible, leading to a lower direct cost during operation.

ODL Decrease Transaction Cost from $30 to Pennies

ODL will further save direct costs for MGI. Per the Ripple website, ODL will decrease cost by 40% to 60%, reduce settlement time to 3 seconds, and allow MoneyGram to effectively offer 24/7 payments services.

Ripple has stated that MGI has historically relied on pre-funding to exchange funds across borders, especially in emerging markets. Pre-funding requires MGI to deposit money weeks in advance to its individual money transfer destinations. The company is forced to leverage much more cash to sustain this process, paying high borrowing fees and transaction costs.

The partnership with Ripple will reduce MGI’s reliance on pre-funding. The company leverages XRP to facilitate real-time transactions. Based on a blog post by Team Ripple, XRP cuts down transaction fees from $30 per transaction to just pennies. Moreover, the transaction time decreases from an hour to only two to three seconds.

We can Expect to See Higher Margins in the Next Quarter (Q4) and in Q1 of 2020

Ripple Labs offer value in terms of cost reduction and liquidity. We have yet to see the effect of RippleNet on direct expense for MoneyGram in Q3 of 2019. Brad Garlinghouse, Ripple CEO, stated that:

“He [Alex Holmes, CEO of MGI] is upset with us because we are not moving fast enough, that was unbelievable. He wants us to launch ODL, formerly knowns as xRapid on more markets, more quickly because they’re having such a good experience with Mexico.”

On its 2018 10-K, direct expense accounted for 50.6% of MGI’s revenue at $732 million. We are likely to see the true effect of RippleNet and XRP in the next quarter (Q4) and Q1 of 2020. I am excited to see the cost costing ability of RippleNet. Therefore, MoneyGram is a good buying opportunity for investors who wants to get ahead of the 2019 10-K and the Q1 2020 earnings release.

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