By Seth Phillips, founder and CEO of the intelligent hedging platform Bound
The digital revolution in banking happened almost in the blink of an eye. It seemed one minute we were queuing up for an appointment at our local branch and the next we were making payments, withdrawals and transfers, all with a couple of taps of a smartphone.
Digital banks such as Monzo and Revolut have risen rapidly to be leading players in a highly regulated industry that until recently regarded chip-and-pin cards as the last word in technological innovation.
These innovators quickly won praise, and huge numbers of users, with their seamless customer experience. A recent survey by the consumer group Which? ranked Monzo, along with other app-based lenders Starling Bank and Triodos, as best for customer satisfaction and mobile apps. By contrast, traditional retail banks were left languishing as also-rans.
With digital banks, most customer service issues can be resolved quickly, and at the touch of an app. There are no tortuous waits to speak to someone in a call centre that are the preserve of many high street banks. It’s no coincidence that the neobank N26 was named the best bank in the world by Forbes last year.
Shaking up the neighbourhood
Disruptive winds of changes have blown through a series of other financial services too. Klarna has risen to become a giant player in the world of buy now, pay later lending. The Swedish payments firm is currently valued at $46 billion, making it Europe’s biggest fintech unicorn.
Meanwhile in the consumer foreign exchange (FX) space, Wise (formerly Transferwise) has revolutionised international money transfers by charging a flat, low fee for each transfer, rather than an opaque exchange rate mark-up.
And finally 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.
By contrast, the commercial FX sector has proved stubbornly resistant to innovation and the benefits that new ideas and technology can bring. In fact its biggest players still look and act much like the high street banks did before the digital revolution forced them to change.
Transparency is the target
Despite regulation that is supposed to protect the interests of customers, commercial FX is still crying out for more transparency and competition. Instead it is too often opaque, a closed shop in which rival FX brokerages woo clients with the promise of ultra-low fees and supposedly razor-thin commissions, but seldom reveal what they’re actually charging.
This lack of transparency is even worse when it comes to forex hedging – a more sophisticated service that enables businesses which trade regularly with foreign countries to protect themselves from exchange rate volatility.
Company Finance Directors and their teams who want to hedge their currency exposure invariably find it to be an analogue experience, with sales conducted largely at the end of a phone.
Merry-go-round of trust
This archaic business model means the client has no visibility of the actual market rates. As a result, in a darkly ironic twist, their desire to protect themselves from exchange rate risk may also open them up to the risk of shady practice by their broker.
Once a broker has built a relationship with a client and conducted a few trades there is nothing to prevent them from slowly nudging up their commission rate. When the client realises that their FX trades are costing them more than they should, they often seek a rival broker, and this merry-go-round of trust begins again.
This cycle, which costs businesses time and money, is as depressing as it is unnecessary.
It’s time we allowed the power of disruption to break that cycle. Customers deserve clear and fixed pricing, where the commission rate stays the same for every transaction. And, inspired by the digital banks, commercial FX must be brought into the 21st century; where customer experience is paramount, clients can trade in seconds and are guaranteed a rapid and effective response around the clock.
The commercial FX revolution is long overdue and only digital disruption can drive the change required to allow genuine competition within the sector and give customers the clarity they deserve.
Seth Phillips is co-founder and CEO of the intelligent hedging platform Bound