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Why the rise of the unregulated broker all comes back to embedded finance

Forex brokers leaving their positions at established brokerage firms and setting up on their own is nothing new. I’m not revealing any trade secrets when I say that over the years it’s typically been disaffected salespeople – potentially seen as earning a bit too much by their bosses and a little miffed at, for example, their commission being capped – that have opened up as an independent.

However, the word out there in the market (at least anecdotally) is that the industry share for this type of broker has jumped to somewhere between 25% and 50% during the pandemic. This has led some to conclude that Covid-19 and the associated home-office revolution is behind this rise in unregulated brokers. The reality, however, is more complex and important than that.

Standing in the way

Over the past decade or so, it became harder and harder to set up as an independent broker, with slowly but surely growing barriers to entry facing anyone beyond the established industry names. Take the price of regulatory noncompliance. Some $1.7bn of fines were handed out by the FCA to five large banks in 2014, the net result of which is that any bank providing wholesale services to brokers now holds them to a far higher level of accountability than the regulator itself would do. Furthermore, for many, the prospect of having to deal directly with regulation, compliance, technology and liquidity management stopped any ambitions to set up as an independent in their tracks – and all that before you turn your attention to the challenge of actually going to market and competing with incumbents.

It’s a real shame because, given that it’s become almost impossible for brokerages to compete on price, and product differentiation is expensive, independents can still create real value through old-fashioned service delivery, specifically tailored to their particular focus segments.

Off-the-shelf answers

The good news, however, is that it‘s never been easier to overcome these issues. White-label platforms allow entrepreneurs to focus on growing their business and delivering a great service to their customers, while the product takes care of the complexity. This kind of off-the-shelf technology, which was originally developed to service the end-user but soon stood out as a transformative product in its own right, makes it simpler for more people to set up an independent brokerage and quickly go about servicing their specific niche.

It's Fintech doing what it does best: taking on all the hard work in terms of integration and managing compliance at the back end, while allowing for innovation and better results for the end user. And in a space like FX, which is so ripe for disruption yet still so potentially profitable, Fintech can help independent brokers both add value for the customer and make money for themselves.

The established brokerage firms don’t really mind this as the independents tend to serve a segment of the market that’s still relatively small and generally don’t reach the flow levels to be viewed as genuine competitors.

 All roads lead to embedded

These white label platforms are, of course, yet another example of embedded finance in action. At its core, embedded finance is about taking an off-the-shelf financial services infrastructure and lodging it into the operations of any kind of company. Ten years ago, anyone who wanted to consume a financial service – be that a pension, a personal loan or a business overdraft – had to go through a bank or a financial advisor, organisations that people generally don’t feel that much of an affinity with. They tend to see banks as a commodity. Thanks to embedded finance, any brand with customer loyalty can come to the market with banking services.

And that’s what’s going on here – unregulated brokers can buy the infrastructure they need off the shelf in yet another example of Fintech democratizing financial services. The white-label technology, which is easily integrated into an organisation, is enabling more people to set up as an independent and target specific niches of the market with ease. It’s allowing them to instantly become fully regulated and compliant providers of a financial service.

The reality behind the rise of independent brokers, therefore, is an embedded finance story rather than a pandemic-spurred trend. Brokers are using white-label products to set up new organisations that are creating value for themselves and their customers. It’s a perfect example of embedded finance in action. 

 

 

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Steve Lemon

Steve Lemon

Co-Founder and Vice President

Currencycloud

Member since

19 Jul

Location

London

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This post is from a series of posts in the group:

Embedded Finance

A group about everything related to embedded finance.


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