Peer-to-peer FX providers pitch corporates
P2P FX is rapidly gaining traction in the retail space, but even providers acknowledge it will take time to achieve significant volumes at the upper end of the corporate market.
P2P FX platforms – which facilitate the trading of currencies on a bilateral basis between end-users, bypassing banks and brokers entirely – could cut treasurers’ costs while, in theory, offering more transparency, after the FX benchmark-rigging scandal.
However, the corporate market is still in its infancy.
For the client, it is
very inefficient and
In a study published earlier this year, freemarketFX, a P2P currency exchange, referred to the need for P2P providers to balance the immediate commercial advantages of their offerings with robust, secure systems. An additional challenge is gaining the attention of larger companies where senior management do not have direct involvement with FX transactions.
Business customers of CurrencyFair, which describes itself as the world's first online P2P FX marketplace, tend to be those where the business owner or someone with P&L responsibility is directly in contact with the payments requiring an FX component, explains CEO Brett Meyers.
“We find that at companies with large accounting departments, the people running the foreign payment transactions tend to just use banks, probably because they are not directly incentivized to save the company money and therefore don’t see a reason to set up with a new provider.”
According to Andrew Burley, UK managing director at Ebury – which has traded £7.5 billion in FX over the past three years – while some large businesses with treasury functions make efforts to assess the commercial value of their FX flows to ensure an equitable distribution across providers, this is far from the norm.
John Booth, CEO at Midpoint, another P2P platform that handles transactions in 17 countries, agrees it tends to be individual decision-makers who understand the value proposition of P2P and want to be seen innovating and disrupting the status quo.
“You tend to find that those that are quick to adopt peer-to-peer FX are like-minded,” adds his colleague and operations director Brad Lemkus. “They are often involved in fintech with an entrepreneurial mindset. They know that there is value to be had from using innovative and disruptive services, and they go looking for that value when they are making international payments.”
Another obstacle to wider use of P2P FX by corporates is that many businesses still don’t know exactly what they are paying for.
Unless you have a margin calculator and the real mid-market exchange rate to hand, it can be difficult to work out the true profit applied to an international currency transfer, says CurrencyTransfer.com managing director Daniel Abrahams, whose company has an average transfer size of £25,000.
“On larger transfers, a better exchange rate will always outweigh a low transfer fee," he says. "Another big problem for corporate customers is honeymoon rates. A bank or broker might give a client a fabulous exchange rate on day one, only to widen the spreads as the client becomes comfortable using the service on a regular basis. Unknowingly, a corporate could be paying more and more on each transfer.” For small businesses, FX is characterized by a lot of misleading information, with terms such as‘free transfers’ and ‘commission free’ used regularly by banks and brokers, adds CurrencyFair's Meyers.
“The intent is to confuse the customer," he says. "We have come across many businesses that thought they were getting free transfers, but were actually paying fees of 3% or more built into the exchange rate.”
Midpoint's Booth suggests that even in circumstances where businesses have best execution contracts in place with their banks, unless they have a total-cost-analysis benchmarking tool, they are unlikely to be able to see if they are being duped.
“Many SMEs do not understand the combination of fees and spread, and how they add up to give the all-in cost," he says. "Small businesses are generally managed into revenue bands depending on how much FX they plan to transact during a set period and it will then be up to the relationship manager or broker to try to ensure they provide the best pricing when the corporate is watching and the worst when it is not.”
Andrew Burley, Ebury
Additional services are being offered to incentivize corporates to migrate to P2P. For example, Midpoint has integrated with online accounting software to enable customers to pay invoices in foreign currency directly via its platform.
Philippe Gelis, CEO at Kantox, a currency marketplace exclusively focused on corporates, principally SMEs, reckons corporates need a platform partner rather than a service provider to help them get the most from P2P FX, for instance by providing support for unusually large trades.
“Let's say 90% of SMEs do not know what they pay with their bank and that 10% have some idea because they benchmark from time to time, while in the case of mid-caps – companies with revenues between €100 million and €500 million – that split is 50-50,” he says.
“The main problem the latter group faces is that if the treasurer or CFO is benchmarking on a trade they get a reasonably good price, but otherwise the spread widens considerably.”
In other words, it is a never-ending struggle between bankers looking at any opportunity to widen the spread and clients looking to avoid being screwed, concludes Gelis, adding. “For the client, it is very inefficient and time-consuming to play that game.”