Why Foreign Exchange Should Draw on Banking’s Appetite for Disruption

By Seth Phillips, CEO and founder of the automated hedging platform Bound

Retail banking used to be a world in which only the biggest beasts could survive and success was measured in hundreds of high street branches. For centuries these incumbents thrived, buoyed by their size and secure in the knowledge that governments viewed them as “too big to fail” and that, for many customers, their choice of bank was for life.

Yet the bricks-and-mortar monopoly, that had existed for so long, ended in a hurry. Customers’ unflinching loyalty to the bank they grew up with first began to erode with the advent of easier switching. But it was the arrival of the digital banks, which offered almost all the traditional banking services but without the physical infrastructure, that turbocharged the change. Suddenly we were all making payments, withdrawals and transfers with a couple of taps of a smartphone.

Digital banks such as Revolut and Monzo have risen quickly to become respected players in the industry, earning praise, and soaring user numbers, thanks to their seamless customer experience. Monzo, along with app-based lenders Starling Bank and Triodos, were recently voted as best for customer satisfaction and mobile apps in a recent survey by the consumer group Which?. By contrast, traditional retail banks were left lagging far behind.

Such is the momentum of the digital banks that few were surprised when N26, a German neobank, was named the best bank in the world by Forbes last year.

Technology turns the tables

And the trail blazed in the banking world is now being followed by digital disruptors in other financial services too. Stripe, the brainchild of two Irish wunderkind brothers, has streamlined the processing of payments so that transactions can be integrated effortlessly into a customer’s online experience.

Wise (formerly Transferwise) has changed the face of international money transfers in the consumer foreign exchange (FX) space through implementing a flat, low fee for each transfer, rather than an opaque exchange rate mark-up.

Finally, Klarna has risen to become a powerful force in the world of buy now, pay later lending. The Swedish payments firm, Europe’s biggest fintech unicorn, is currently valued at $46 billion.

Yet innovation has so far struggled to make inroads into the commercial FX sector, whose biggest players remain surprisingly averse to change, looking and acting much like the high street banks did prior to the digital revolution.

Digital age of transparency

Despite an abundance of regulations supposedly designed to protect business customers’ interests, commercial FX is in desperate need of greater transparency and competition. Too many clients are being disappointed by rival FX brokerages that claim rock-bottom fees and tiny commissions, but seldom reveal exactly what they’re charging.

This lack of transparency is exacerbated when it comes to more sophisticated forex hedging, which enables businesses who trade regularly overseas to protect themselves from exchange rate volatility.

Company finance directors and their teams who want to hedge their currency exposure invariably find it an oddly analogue experience, with sales conducted largely at the end of a phone.

FX deserves a competitive future

This outmoded business model allows the client no visibility of actual market exchange rates, meaning they could be at risk of shady practice by their broker, who is perfectly free to surreptitiously nudge up their commission rate over time. When the client realises that they are paying over the odds for their FX trades – and look for an alternative – this merry-go-round of trust begins again.

The power of disruption, rather than further regulation, is needed to break that cycle. Customers deserve clear and fixed pricing, where the commission rate stays the same for every transaction. Following the lead of the digital banks, commercial FX must be brought into the 21st century; where clients can trade in seconds and be guaranteed a fast and effective response 24/7.

A digital revolution in commercial FX is needed to shine light onto a sector that has been held in the shadows for too long. Only that will give customers the clarity and value they deserve.

Seth Phillips bio:

Seth Phillips is CEO and co-founder of Bound, the intelligent hedging platform which enables businesses of all sizes to protect themselves from fluctuating exchange rates.

After an early career in real estate and strategic consultancy, in 2010 Seth started Enerlyte, a company designed to improve how people interact with their utilities and to reach energy efficiency and energy conservation goals. He successfully led the company through its lifecycle from concept through to launch and ramp-up.

From Enerlyte he moved to become entrepreneur in residence at The Fintech Collective, a next-generation Venture Capital platform, built to harness the power of curated networks.

Prior to co-founding Bound, Seth worked for five years as an Executive Director and Director of Product Management at Paxos, the cryptocurrency broker that provides business-to-business infrastructure for cryptocurrency.