In a note published on Monday evening, Moody's said that an agreement last Wednesday between United States-based financial technology (fintech) company Ripple and the kingdom will see Saudi banks' cross-border payment infrastructure begin to adopt the blockchain technology on which cryptocurrencies are based.

Saudi Arabia could save itself hundreds of millions of dollars in foreign currency exchange fees if its pilot programme to use blockchain for cross-border payments is rolled out, according to credit ratings agency Moody's.

"Saudi banks will potentially improve their profitability on cross-border transactions by reducing the cost of each transaction, while gaining revenue with higher volume as the customer experience improves with the saving of money," the note by Moody's analyst Christos Theofilou said.

"We estimate that even a 10 percent reduction in the cost of completing and managing a cross-border transaction will translate to savings of roughly $200-$400 million per year system-wide," it said.

Saudi Arabia has a high rate of expatriate workers who make a large volume of low-value money transfers to their home markets. World Bank figures suggest the cost of such transactions is typically 7.1 percent of their overall value, but Moody's said this could halve if blockchain technology was adopted.

It also pointed out that while blockchain transactions for money transfers "are still untested on a large scale", they could address problems with inter-bank transfers which typically take at least a day and can only be done during business hours. Transactions are also sometimes routed through multiple banks, leading to uncertainty over costs and completion times.

Last week, money transfer company UAE Exchange announced it had completed a deal with San Francisco-based Ripple to allow 'real-time' cross-border payments, which the former's CEO Promoth Manghat said in a press release would "have an impact on the speed and cost of cross-border transactions".

This followed on from an announcement by RAKBank in November last year that it planned to use Ripple's blockchain network to allow customers to transfer funds to India.

In a note published last Thursday, Vijay Valecha, chief market analyst at Dubai-based Century Financial Brokers, said that although Ripple's cryptocurrency, XRP, had experienced a tumultuous start of the year, losing 70 percent of its value between the start of January and mid-February, as investors feared the impact of regulatory action, a trial with money transfer giant Western Union could prove to be 'a turning point' for the company.

"The list of banks and financial institutions that are using Ripple’s products is growing and if things work out smoothly, Western Union can be added to that list this week," Valecha said.

Valecha said that Ripple has two main products: xCurrent, which is being used by more than 100 financial institutions, and xRapid, which is based on its own XRP cryptocurrency. The deal with Saudi Arabia is based on xCurrent, Ripple said in its statement, while the Western Union trial involves using xRapid.

"Ripple has made more headway with partners than any other cryptocurrency," he said.

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(Writing by Michael Fahy; Editing by Shane McGinley)

(michael.fahy@thomsonreuters.com)

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