How much do international payments firms charge?

There are new ones opening all the time, it must be profitable. What am I missing?

The most important factor to a business that has exposure to foreign exchange markets is transparency.

If you are an importer buying currency to pay your suppliers invoices or an exporter who is investigating invoicing your customers in their home currency, you need to be sure that the relationship you have with your payments firm is based upon trust.

Banks have long held sway over what they consider ancillary services they provide to their customers. Banks’ primary business is lending money and they have built an understanding over many years that their customers’ ability to borrow as being the lifeblood of the business.

Without an overdraft facility to aid cash flow or a long-term loan to buy a plant or machinery businesses would struggle to exist. Therefore, banks leveraged their lending ability by insisting that other services like trade finance, cash management and foreign exchange were tied into the relationship and currency transfer rates charged for FX business were not necessarily competitive. Banks also charged currency exchange charges which have now largely disappeared.

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Banks continue to take excessive charges from FX deals executed on behalf of their clients for what they consider to be non-market amounts, their margins are generally what would be considered excessive by the more competitive fintech driven payments firms. Banks are “used” to dealing in more “marketable” sums (£100k+) so they have never tried to break into the market for smaller trades and this has left a niche for smaller, more nimble, fintech businesses to step in and offer more competitive rates.Banks view foreign exchange profit separately from overall relationship income as they have become siloed in their cost/income distribution.

The advent of greater regulation of banks has meant that they are no longer able to tie in use of one facility to another and they have virtually abandoned any pretence at competitiveness.

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In its early days, the fintech payments market was seen almost as a license to print money as firms took advantage of the rates published by banks and were able, just by trimming prices only very slightly, to make significant profit. As the market has matured, spreads have tightened considerably, payments forms still provide just the “ all in rate” for any payment but provide market rate, margin and all in rate.

The retreat of banks from this business has been made almost complete by the larger market makers in foreign exchange concentrating on either big-ticket customers who convert sums in excess of ten million pounds per annum or they have simply become liquidity providers making a tiny margin form every trade they execute.

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The latest statistics show that $5.4 trillion is traded every day in the FX market. It is now safe to say that “at the top of the pyramid” all that turnover is handled by maybe six to ten banks. If we consider that the volume of buyers versus sellers in each currency is roughly the same, those six to ten banks can quote incredibly thin spreads (the difference between their buy and sell rates) to make huge profits. That spread is therefore filtered down through second tier banks and through fintech firms to the client. With every level widening their spread minimally, the profitability of the operation is assured. That is a relatively simplistic view of how FX firms make a currency exchange profit and there are other considerations such as risk, particularly when delivery of currency is at some time in the future or the currency involved is less liquid than the G7 “majors”.The reason it appears that so many new firms are coming to market is driven as much by innovation as by profitability. New businesses with tech solutions in this arena believe that they can profit by providing customers with a product that supports their business and that will drive volume which in turn leads to economies of scale.

Within this market, there are several firms which fail due to their inability to attract a critical mass of customers and others simply get swallowed up by “larger fish” who are prepared to simply “buy” another firm’s’ client list.

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The term foreign exchange charges has to all intents and purposes disappeared from the market now. Fintech firms simply charge a rate for the transaction and that is ”all in”. Firms who provide exclusivity to their payments provider and transact a certain level of business in a given period will be able to negotiate a bespoke spread.

About Alan Hill

Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.”