The vast majority of businesses lose out due to high markups, implicit costs, inefficiency and a lack of access.
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.
The small Midlands importer deserves the same level of access, giving the owner or finance director the ability to cross-check whether he is actually getting a competitive deal and, more importantly, understanding the true cost of his international trade. At the moment, the high street banks fix exchange rates once or twice a day, and place hefty markups that deviate by as much as 5 per cent away from the mid-market rate to allow for their own risks.
While price compression is important, banks should also deliver more value to meet the needs of an average business that trades internationally. For instance, the average business deserves the ability to set an exchange rate alert, trace a payment to its recipient and know what it is being charged to the pence before funds reach the other side. Banks are currently not solving these issues, so it is left to financial technology entrepreneurs to bridge the gap.
Since the mid 1990s, there has been an explosion in non-bank regulated foreign change brokers. The industry emerged to handle the growing wave of overseas property, emigration and import payments. The vast majority set up with good intentions, to offer a far more competitive exchange rate than the high street bank, mixed in with personal service and currency guidance. The market positioned itself as private banking for the everyday individual and small business. For the first time, it democratised the ability to book a forward contract, set limit orders and, in recent years, currency options. These are services not available to the average SME logging into online banking.
Unfortunately, trading over the phone with a currency salesman has its challenges. Opaque currency specialists run the risk of offering you a fantastic exchange rate on trade one, only to widen and widen their markups as you become more comfortable using their service. This phenomenon is known in the industry as the ‘honeymoon rate’. It is the classic bait and switch, offering a very attractive teaser rate or special offer to attract customers.
Highly paid currency traders in increasingly flashy offices also bring sizeable increases in overheads. Margin maximisation becomes the overriding business focus for service-oriented currency brokerages, reliant on phone-based dealers rather than achieving scale and honest pricing through technology.
This year foreign exchange for the masses will start being as simple and as user-friendly as booking a plane ticket online. In the past couple of years, there has been enormous interest from the VC community in the cross-border payment space. Investors from Silicon Valley to Europe are backing cross-border payment businesses that are using peer-to-peer, social and mobile to redefine antiquated financial service provision.
Daniel Abrahams is the co-founder of CurrencyTransfer.com, an online marketplace matching businesses with international payment quotes
Key points
■ Businesses are continually hoodwinked at retail and commercial level when suppliers boast of ‘0 per cent commission’ or ‘fee free payments’.
■ Foreign exchange suppliers, for travellers and businesses, should visibly display and timestamp the real mid-market rate and sell rate side-by-side.
■ Banks should deliver more value to meet the needs of an average business that trades internationally.
