Many foreign exchange brokers advertise exceptional and ‘limited time’ exchange rates, personalised just for that particular customer. The rate on offer seems to be reduced by up to 0.75 per cent and attracts eyeballs. But this, in fact, is the oldest trick in the book of forex players. While these traditional players pin up static rates on their LED screens, these rates are often set to surplus and allow them to keep a good margin. Unfortunately, this means that the customer pays more than he should.
Just as in the stock market, constant fluctuations in forex rates have been the key to foreign exchange trade across the world. Yet, most of these forex vendors have a fixed rate displayed on their counters for a whole day, and sometimes for several days in a row. However, when dealing among themselves, these vendors use the underlying IBR or interbank (forex) rates only. These surplus rates go mostly in favour of the vendors as their margin rates are often kept in the ‘safe-zone’, far above the general fluctuation scales. If the moneychangers would not keep such a big margin, the overall intra-day crests and troughs would cause them to incur losses. Hence, the brokers often cushion the rates with 2-8 per cent margins.
There are two factors that help these forex brokers ensure such profit margins; first, the opaqueness of the retail exchange and, second, the customer’s lack of knowledge about how the market operates. Even if the most seasoned customers are aware and cautious about the practice, they are not able to do much due to the inability to fathom the actual market prices. They do resort to haggling, which has become a common exercise with small foreign exchange deals, but most of these efforts are in vain.
It is here that technology comes to the rescue. A number of solutions have come up, promising a more transparent and fairer foreign exchange market. These include peer-to-peer foreign exchange platforms, which take the middlemen out of the picture, by providing customers crowdsourced and mid-market rates with a flat rate of commission, usually 0.5 per cent for a transaction and a small fixed charge. Although it is an improvement as compared to the retail forex service model, it still has shortcomings. The platform itself becomes rogue, like an online forex broker increasing its commission and fixed charges, in due course. Another disadvantage is that these platforms typically deal in a limited number of currencies, usually 15-30 currencies.
A forex marketplace introduces competition amongst forex brokers, making them reduce their margins and enhancing the value for customers as a result
The second, and perhaps the best alternative for the retail forex industry, is the marketplace model. The forex marketplace model is simply a regulated meeting point for foreign exchange vendors and consumers. It provides a virtual, transparent and user-friendly venue for forex professionals and consumers to sell or purchase currency without worrying about paying more than the standard brokerage rates. The best part about the model is that instead of putting caps, it makes the marketplace open by introducing competition amongst forex brokers, making them reduce their margins and enhancing the value for customers as a result.
Each of the vendors on the platform is aware that it is bidding against a number of other vendors and the only way to make more profits than the others is to reduce the profit margin. This attracts customers to make more intra-day sales and boost their businesses. Most of the vendors offer rates on the platform which are 1.5-7 per cent better than what they are offering their own customers.
Some of these platforms also foster competition by letting the brokers know where they stand in comparison to the other players in real time. If their margin is lower or higher than the average market price, or if the demand for a currency increases, the vendors are automatically notified about it.
Benefits of online marketplace model
– The marketplace model offers 100 per cent price transparency. In retail forex markets, due to the hidden transaction charges and fees, the consumers have no idea what they are paying for.
– The model is more accessible and user-friendly for both vendors and consumers as they can see the statistics for themselves. They can compare real-time currency rates from banks. The model provides a level playing field for all.
– Instead of giving in to the whims of individual banks and vendors, the model divides the profit between both the parties and helps customers make an informed choice. This is unlike the retail markets where the vendor controls the transaction.
The bottom line
To conclude, the forex marketplace model, like other online marketplaces, puts the power of choice in the hands of the consumer rather than the seller, by the implementation of the perfect economic strategy. It introduces the concept of competition that results in the best value for buyers and a fair battleground for the vendors.
The author is CEO and founder of Bookmyforex, an online foreign exchange services provider.