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Even bankers think FX margins on payments are excessive: fintech and regulation to the rescue?

For those recently travelling to Australia for Swift’s annual Sibos conference, currency exchange rates were an inevitable topic of conversation. The rates varied enormously, leading one of the major Australian banks to suggest that FX exchange rates should be regulated.

A bank asking for regulation is unusual, but maybe they have a point.

FX trading is often described as the most transparent market around. Even without regulation, traders are looking for narrow buy/sell spreads and these are disseminated in real-time by market data vendors like Reuters and Bloomberg.

Under the European MiFID 2 regulations, banks have to show that the price given in any securities transaction is a fair market price. To do that they have to show the price given against a basket of trades that occurred at the same time. The $5.3 trillion a day FX market has more than enough prices to show at a particular time what the mid-point between the buy and sell was and this can be shown.

But MiFID 2 covers FX trading in the highly regulated securities markets. In the real world, when travelling to Sydney, I bought $200 Australian dollars for £134.40, an exchange rate of 1.4881 plus £9.99 commission and fees for a total cost of £144.39 – an effective exchange rate of 1.385. At that time the exchange rate mid-point was 1.84, creating 19% and 25% margins. In reality, that’s a 20 to 25% mark-up simply for exchanging the currency.

Given that regulators around the world are forcing credit card operators to reduce their interchange fees down to the 1% area, you can see why they might be minded to step into the commercial FX currency markets. From a consumer or corporate perspective, words like gouging and profiteering come readily to mind, and regulators don’t like to be seen allowing that on their patch.

Even without regulation, banks face competition from other mechanisms, (Fintechs), offering better exchange rates and lower fees, and are hamstrung by their ageing processes and systems.

Many banks use the Daily Branch Rate for regular international payments involving currency exchange The Daily Branch Rate was created in the 1980s when few physical bank branches were connected electronically to the FX trading floor. Each currency was priced at the highest change from mid-point over the preceding year for both buys and sells. This way a currency could reach a 12 month high or low during the day and not have a market risk on the rate being offered to the branch customers. Many banks still apply these ‘rich margin’ rates to the overnight batch runs for retail and SMEs usually on any amount up to $50,000.

Branch rates, wire transfers, cable rates and telegraphic transfers are names from a pre-digital era. Today we can see the mid-point of the FX throughout the day and in real time. The technology has developed such that the big ecommerce companies can receive an FX ‘wholesale’ rate (the mid-point price plus a small margin) from their bank. They in turn add a further margin for themselves and charge that rate to their customer. This is started to become big business for some e-commerce companies as they enjoy a double bubble: margin on the goods sold and margin on the FX.

It is this high margin pricing that the Australian banker was concerned about.

And when a banker points out excessive margins, fintechs investing in that space and regulation can’t be far behind.



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