Peer-to-peer FX providers hedge disintermediation threats
Leading P2P providers are confident their FX products can rival leading banks, but tech bulls concede the shifting FX market-structure landscape will still see the top-tier financial institutions dominate.
Trading with buy-side peers using mid-point matching technology to get a clearer final cost was identified as a leading trading route for asset managers by Joseph Hoffman, director of equity derivatives and FX at Russell Investments, at this year’s TradeTech FX conference.
However, there is no unanimity among even ardent peer-to-peer (P2P) supporters about the extent to which banks will be disintermediated in FX and be forced by their corporate clients to offer access to the best third-party-managed P2P platform instead of their own proprietary platform.
According to Brett Meyers, CEO of CurrencyFair, a big disruption is possible as banks recognise the changing winds in market structure and pro-actively power the next generation of consumer fintech to maintain their relevance. “It seems there is a movement to companies recognising what they do well and where they fit in the value chain,” he says. “For many banks, the ability to be as relentlessly consumer-focused as the new players is difficult.”
However, most refrain from predicting that leading bank market makers will exit FX materially since it is a very profitable business led by the technology prowess of the leading dealers.
Kantox CEO Philippe Gelis adds: “Small and medium banks with no leadership in FX will probably be interested in partnering with peer-to-peer platforms, though, because this will give them an edge regarding client experience.”
Daniel Abrahams, managing director of CurrencyTransfer, states: “In our industry, there is a statistic that floats around suggesting 85% of the corporate and private client market still transact via a high-street bank.
“We are seeing innovative fintech companies take market share, positioning the banks as a common enemy and I have no doubt this will aggressively continue. There will always be customer inertia and the perception of trust that will still keep a big percentage of the market trading with banks, although companies who stand on principles of impartiality and transparency will drive the industry to a point where banks must become less opaque and more fair when offering global currency transfer services.”
Andrew Burley, UK managing director at Ebury, is even less convinced the future of FX lies outside the hands of the leading global banks.
“FX offers a non-cyclical revenue stream with a low capital commitment,” he says. “Banks need FX to increase their aggregate return on capital. To do this they need to ensure a share of the FX wallet from their loan book, which is why FX users often feel bound to their bank.
“Banks have committed significant resources to internalizing their FX flows with the development of their own execution platforms.”
John Booth, Midpoint
Midpoint CEO John Booth believes it is unlikely that banks would no longer offer FX services simply because they are in the middle of large cross-border retail flows and payments is their last bastion.
Brad Lemkus, operations director Midpoint, acknowledges: “FX services are an important business for banks in terms of revenue generation. They won’t surrender without a fight to the disruptors. After all, the peer-to-peer providers still use their plumbing infrastructure to move the money around.”
Banks will not exit FX materially given customer demand for customized FX solutions and liquidity, but under pressure from regulators and customers to offer best execution they will most certainly offer access to P2P FX platforms.
That is the view of Dmitri Galinov, CEO of FastMatch, who is confident the future lies in multiple P2P platforms.
Booth agrees. “The market is so large and fragmented, that we don’t think it will be consolidated entirely by a single marketplace be it peer-to-peer or institutional,” he observes.
Philippe Gelis, Kantox
Gelis at Kantox adds: “The market is far too big to have a single marketplace and regulators would never allow this anyway to prevent a monopoly. There will probably be several global marketplaces in each segment: consumer, small businesses, large businesses.”
Ebury’s Burley believes there will be consolidation in the P2P FX marketplace, driven by factors other than just price.
“Security, choice, flexibility, speed, efficiency of settlement and breadth of product offering all contribute to the buying decision,” he says.
While suggesting that most current P2P models are standard broker models rather than true marketplaces, CurrencyFair’s Meyers accepts it is possible for many models to exist in any given currency corridor, “because there is no real advantage to the customer in larger broker models”.
He concludes: “That said, with a true marketplace model, the customer proposition improves as more and more people use it.”