rates are shown, however, how do we, the customer, know how good this rate really is?
We will always seek to either pay the least amount for a fixed amount of foreign currency or,
alternatively,
receive as much currency for a fixed amount of base (home) currency. In this regard, we will select the provider that has the most favourable rates based on a cross section of the rates available. But how do you feel if the “best” rate is giving you say €14,518 for your £10,000 (GBP/EUR = 1.4518) when you find that the interbank rate, the underlying rate of exchange in the professional trading market and the rate at which most large corporates and financial institutions (both bank and non-bank) can exchange currency is 1.4558?
Banks, the “producers” of currency (through the money multiplier), control the foreign exchange markets and, ultimately,
the payments market.
Specifically, Deutsche bank, UBS and Barclays rule the FX landscape. Between them, these three institutions control over 40% market share across all customer segments – retail, corporate and financial institutions, albeit with a focus on the latter which accounts for over 85% of daily volume. These banks were first to grasp and migrate to a digital FX business model, a model where FX is commoditised and services across pricing, execution, account management and settlement/ payments are delivered, securely, across private networks and the web. Risk management is increasingly automated through complex algorithmic “black boxes” that has helped these banks cement their industry leading positions through huge economies of scale and experience.
The larger the transaction, the lower the per dollar cost of processing the settlement and making payment as, up to a reasonable value (around $25 million between major currencies such as USD, EUR, GBP, JPY and CHF) it is the transaction that primarily drives the bank’s costs not the size of the deal. Given that one of the things banks do very well (with considerable automation and efficiency) is process transactions and make payments, it is shocking to see the level of price discrimination
across customer segments. The same processes and systems are used to trade, offset risk and allocate the proceeds of transactions for all but
will be gifted enhancements in product, service and price that better meet the needs of customers.
Banks, the “producers” of currency (through the money multiplier), control the foreign exchange markets and, ultimately, the payments market
consumers and smaller businesses (sub $1 million turnover), Typical spreads offered to financial and large corporate clients are considerably less than 1 “pip”; that is less than 1 euro cent for every £100 of Euro’s bought. In comparison, SMEs are often quoted rates with well over 100 pip spreads. You or I changing money or performing a remittance are likely to pay over 200 pips.
The banks have too much power and control as suppliers of FX services. I believe that by fragmenting the industry value chain across different participants in the industry who focus on doing one or two things exceptionally well, the SME and retail FX markets
Right now, there are more environmental trends that can be leveraged to change the dynamics of the FX industry than at any time in the past 5 years. There is new regulation, the Single European Payments Area (SEPA) initiative, a generational evolution in technology adoption by end-users, rapid emerging markets growth, greater awareness and knowledge of FX in downstream consumer segments, cost focused management accounting, rapidly growing remittances by diasporas to their home countries, the decoupling of market access and liquidity….... the list can go on, but I am sure the point is made.
55 entrepreneurcountry
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