ODL or On-Demand Liquidity is the next frontier in the settlement of cross-border payments. It’s a massive enhancement to existing payment networks, which usually require participants to have pre-funded accounts and correspondent relationships, across all markets. To better illustrate this quantum leap in technology, ODL vs. Traditional is like going from VHS straight to Netflix.
At Euro Exim Bank, we are proud to be at the cutting edge of global payments through our partnership with RippleNet , the world’s pioneer and foremost provider of ODL payments networks.
OLD Vs. Pre-Funding: What’s the Difference?
To put it simply, ODL is significantly cheaper and less resource intensive than Pre-Funding.
When using traditional payments networks, participants are required to already have accounts in the origin and destination countries with funds already in these accounts, hence pre-funded. This is expensive as there are costs associated with maintaining availability of funds. Furthermore, the complex system of payments that traditional networks use, including numerous intermediaries, adds to cost.
An ODL network connects participants to a digital asset exchange where liquidity is available on-demand in the form of a cryptocurrency such as Ripple. These cryptocurrencies or digital tokens can then be transferred to the receiving party, who can then exchange the cryptocurrency back for the fiat currency of their choice, or even hold on to the digital asset for future use.
With an ODL network, the need for intermediaries has been eliminated and because of the nature of digital assets and transactions, value transfer can happen instantaneously. The nature of blockchain and digital value transfer also mean that this whole process doesn’t cost that much and the infrastructure required to operate it at the point of payment and receipt of payment is minimal.
Here’s a graphical illustration of how it works:
Great News for Emerging Markets
The biggest beneficiaries of ODL international payments networks such as RippleNet are emerging markets and markets in troubled areas of the world. As with much of the digital revolution, the digital finance revolution is levelling the playing field and democratizing global payments networks. This is allowing for everyone to have a fair chance at a reasonable price. Here are some of the most important benefits of ODL networks for emerging markets:
Low Cost – For emerging markets cost is a huge factor. Due to competition, margins are sometimes razor thin and a low-cost payments system can ensure that entrepreneurs get to keep more. Low cost can also be a barrier to entry and systems such as these can make international markets more accessible.
No Requirement for Pre-Funding or Foreign Exchange – As already discussed, ODL networks remove the need for pre-funding. They also remove the need to find foreign currency such as USD or EUR to settle transactions. Many emerging markets often face foreign exchange shortages, leading to exorbitant exchange rates adding to costs and reducing efficiency. ODL networks allow for direct conversion between the digital asset and the destination fiat currency and vice versa.
Fast & Secure – ODL networks, blockchain and cryptocurrencies all combine to form a highly secure, highly efficient and virtually instantaneous settlement system. What normally took 3 to 5 business days can now be accomplished in less than 3 to 5 minutes. For entrepreneurs in emerging markets who often face cash-flow difficulties, this increase in speed can be a life saver.
Reduced Restrictions – As digital payments are democratizing the payments landscape, they are also reducing restrictions on doing business. Payments are no longer subject to the whims of payment networks owners. This means all parties are free to transact, bypassing various restrictions, sanctions and other unfair and punitive measures in place on traditional networks.
A New Era of Global Payments
As other industries have jumped into the digital age, now finance is too. While the road ahead for cryptocurrencies, blockchain and ODL networks is long, it won’t be long before adoption rates skyrocket as people around the world experience the ease, security and convenience of futuristic global payment settlements.
If you are interested in using ODL via RippleNet to settle your trade payments, speak with one of Euro Exim Bank’s experts today.
