It is worth looking at some of the key problems that exist in the $21trn (£12.6trn)-a-year business in international payments.
If I were to visit my local supermarket, I would leave knowing the exact cost of my bananas, apples and pears. The price is explicitly stated on the shelf and I would know to the penny how much my weekly shop affects my bottom line. Foreign exchange should be no different: it should be easily understandable and visible to the end customer.
Unfortunately businesses are continually hoodwinked at retail and commercial level when suppliers boast of ‘0 per cent commission’ or ‘fee free payments’. These claims are simply a marketing play. The promos and slogans are packaged in a way to hide a poor rate of exchange, leaving some to believe they have got their foreign exchange free of charge.
While offering 0 per cent commission, airport bureaus commonly apply markups that deviate by as much as 10 per cent away from the real exchange rate. This unknowingly costs the average British holidaymaker up to £50 on every £500 worth of foreign currency bought. In business, foreign exchange markups can be as much as 5 per cent of the currency turnover. The cost of sending £100,000 to a supplier in China can amount to £5,000. All costs are implicit, with profits built into the rate of exchange. Not very transparent and extremely unfair.
At the supermarket, you do not expect a markup to be applied to your shopping when you bring it to the till. Likewise, the average business deserves the right to assess the cost of a currency purchase on its true merit. A finance director or entrepreneur should not need to bring out his calculator each time currency is bought or sold.
There are two major costs in any currency transfer: implicit and explicit costs. The difference between the ‘real rate’ (that is, what you see on Bloomberg) and the ‘sell rate’, the rate you are offered, will always be the key distinguisher on how much your foreign exchange transaction is costing you.
It is clear foreign exchange suppliers, for travellers and businesses, should visibly display and timestamp the real mid-market rate and sell rate side-by-side. This way the customer benefits from 100 per cent price transparency.
Historically, the major high street banks have held more than a 90 per cent market share on international payment provision, with the average SME having little alternative to benchmark rates. The internet has levelled the playing field, and in the past couple of years we have seen the emergence of technology disruptors looking to shift the balance of control.
The average FTSE 100 firm and a small importer from the Midlands should have the same level of access to competitive foreign exchange rates and visibility on price transparency. Within capital markets, the cost of making a cross-border payment is in the region of 50 pence per £1000 traded. If you are a FTSE 100 company trading hundreds of millions of dollars a year or even per payment, you have access to live capital market price feed aggregation platforms. The FTSE 100 company has multiple quotes being streamed from a panel of banks, all vying to win a large multimillion pound trade. Cost is visible and timestamped at the point of booking a trade.