It is all about trust.
When you deposit a dollar in a bank you can usually trust that institution to pay you back that dollar.
When you deposit your dollar with some schmuck on a street corner, you might get your dollar back but you probably won't.
Yes, in the early days of Ripple some people did get burnt. Scammers who knew the system would set up fake IOUs for bitcoins and then get people who didn't understand the system or were still trying to figure it out to "trust" them and buy their fake bitcoins for XRP.
This hasn't gone away. Anybody with a bare minimum of work can set up an IOU for anything, Dollars, Bitcoin, Euros and try exchanging them for anything else.
The hard part these days is getting people to "trust" that you will honor your IOUs.
Ripple is all about creating networks of trust.
I could set up an IOU system with say $100 in it. You give me $100 fiat, I give you $100 IOUs. You give me back $25 IOUs I give you back $25 dollars. There need not be a single other person or entity invoved in this network.
Or a bank could set up the same thing. Bank A could set up an IOU for $1,000,000. Bank B could set up an IOU for $1,000,000. Whenever one bank needs to pay the other they simply swap IOUs. Periodically they check balances. If Bank A has $900,000 bank B IOUs and Bank B has $800,000 bank A IOUs then Bank A owes bank B $100,000. This is all done in a private Network that they set up between themselves which they do not have to invite any other institution or currency into. All Bank A has to do that is make a choice to accept Bank B's IOUs at face value, and Vice Versa.
But IOUs are not hard pegged. The example above works only because both institutions are willing to trust each other. They are willing to voluntarily hard peg a dollar IOU as worth a dollar.
If institutions do not trust each other and they still want to do business, they can use XRPs (Ripple's Bitcoin) which have no counterparty risk. Keep in mind that using XRPs is completely voluntary. XRPs are not pegged to any value and a dollar IOU on one exchange could be worth more or less XRPs than on another. As an example for a dollar $1 IOU exchange for XRPs on Snapswap you get about 92.5712 XRPs on Bistamp you get something like 93.12741 XRPs and the Rock will give you 125.4756 XRPs. The reason for this is that Snapswap has the most liquidity and people trust it to honor their IOUs whereas The Rock has very little liquidity and almost nobody extends them any trust.
If I trust an exchange and you trust the same exchange we can swap their IOUs directly. So if I trust snapswap and you trust snapswap i can send you Snap Swap IOUs. If I trust snap swap and you trust bitstamp we cannot exchange IOUs directly, so if want to send you a dollar the system starts at your exchange. On bitstamp $1 is worth 93 xrp, the system reserves the best price for this many XRPs. It then works backwards. On snapswap $1 goes for 92 XRPs so in order for Bitstamp to get 93 XRPs I would need to spend slightly more. So in this case for you to receive $1 when there is no trust between us it would cost me around $1.005 in about 3 seconds.
Which sounds complicated, except when you don't want to exchange dollars for dollars, but instead want to send dollars for Euros. Or Yuan for Pesos.