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Looking to 2020: The future of the FX transfer market

Fintech should have brought a level of pricing transparency to the foreign exchange market, says Helen Scott, CEO of currency exchange platform Eris FX.

The recent revelations from the European Central Bank (ECB) that banks have been overcharging smaller corporate customers for their FX derivative transactions will come as no surprise to many finance directors

The survey found that the majority of corporate clients pay about 50 basis points — or 0.5 per cent — on contracts on which the largest companies pay just 2bp.  Anecdotal evidence says this figure could actually be up to ten times higher at 5%.

Banks have always regarded FX, particularly with SMEs and retail customers, as a cash cow.  Profits from retail forex transactions have been impossible to separate out in banks’ accounts; some estimates put them responsible for more than 10% of their global revenues.

The advent of the “fintech” sector should, in theory, have brought a level of pricing transparency to the market, but it hasn’t.  Whilst the specialist online payment services firms undoubtedly offer better pricing to some corporate customers some of the time, many still price customers individually behind closed doors.

Firms are extremely reluctant to publish their prices publicly, preferring instead to negotiate ‘bespoke’ pricing with individual clients, some of whom will fare better than others when confronted with a dealer hungry for commission. This makes it difficult to easily shop around for the best deal.

Another common practice is to offer “teaser” rates which initially look attractive but soon creep up to near bank levels.

The true nature of the prices on offer were often deliberately obscured by misleading “currency converters” which returned only the unachievable interbank rate, or equally misleading messages to potential customers such as “no fees”, “0% commission” or “bank-beating rates”.  None of these statements actually told a customer or potential customer what rate they would be offered.

One of the reasons for this has been the poor levels of price transparency as well as the lack of regulation of the industry.  Whilst the payments element of an overseas transfer has been protected since 2009 by the Payment Services Directive, this doesn’t cover currency pricing.

Further, the Financial Services and Markets Act doesn’t apply to payment providers which are not banks, making it difficult for the regulator to act against the sector as a whole instead of firm by firm.

The good news is that things may be about to change.  On 1 February this year the FCA published PS19/3, its General standards and communication rules for the payment services and e-money sectors, due to come into effect on 1 August.

The new regime is designed to create standards equally applicable to all firms. According to the FCA “It will equip us to respond better to the evolving payments landscape.”

New order

The first stage of the new rules will be to stamp out all remaining misleading marketing messages, with the FCA promising a near zero tolerance policy from day one.  The effect of this will be that payment providers will no longer be able to hide behind vague and unsubstantiated pricing statements unless they can back them up with evidence.

In the short term, this is likely to lead to a period of consolidation of players’ marketing positions as they work out how to present a unique proposition without actually giving their pricing structure away.

However, a combination of factors is likely to change this. The FCA seems keen to move beyond just stopping malpractice to actively promoting price transparency of a kind never before seen in the sector. It is being helped in its engagement group by the Transparency Task Force (TTF), whose FX Ambassador is Helen Scott, CEO of online payments provider Eris FX.

The TTF has produced a white paper which recommends standardisation of cost and price information which should be presented to customers at a much earlier stage in their journey, such as on the home page of a provider’s website, instead of having to compete the often lengthy registration process before being given a price.

The next Cross Border Payments Regulations (CBPR2) due out in April 2020 back up this stance of standardised pricing information, and the EC has also expressed support for bringing proper upfront price transparency to the industry in a paper published late last year.

The recommendations are aimed primarily at consumers and micro enterprises in the first instance, and whilst the benefits to corporates are not immediately obvious, they are likely to benefit as well.

Firms will have to price competitively or lose business to a rival, which means prices are likely to fall significantly in the short term. Any price publicly offered to consumers is unlikely to be a worse deal that would be offered to a corporate customer. That in itself will make it easier to shop around and compare deals.

The other likely outcome is that the rules will eventually be rolled out to explicitly cover corporates, extending the idea of treating customers fairly beyond individual consumers, but even the proposed changes should make for a happier 2020 for those transferring money.

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