Non-bank providers working in the corporate FX sector – such as technology firms and hedge funds – are failing to compete effectively with traditional banks, according to a study from independent analyst East & Partners.
Titled Business and the $117 Billion a Day Market, the report says that, while the overall spot FX market is growing daily, activity in that market from large and small corporates is on a steady decline – with no signs of reversing.
Traditional banks are dominating that shrinking, corporate FX landscape all around the world, with non-bank providers unable to replicate the success they have enjoyed in retail FX.
Globally, says the study, non-bank providers account for an 11% market share of corporate FX. Only 15% of UK businesses use non-bank FX providers – but that drops to a “staggeringly low” one in 20 throughout China, Hong Kong and the US.
Another eye-catching trend that emerged from the research is that micro-businesses and SMEs are using personal credit cards in lieu of FX management strategies to cover the cost of foreign payables.
Some 37% of micro-businesses and SMEs reported the use of personal credit cards as a spot FX payment tool. In China, that figure almost doubled (71%).
Furthermore, Chinese corporates are more than three times as likely to use credit cards to cover outstanding FX payments as the market average.
East & Partners Asia head Amit Alok explained that the Asian market is proving to be a “tough market” for non-bank providers.
“The report shows that Asian businesses – particularly in China and Singapore – use branch networks in addition to online platforms and phone to execute their spot FX transactions at a much higher rate than other regions,” he said.
“This gap in service availability may provide a clear explanation as to why niche providers have not been able to increase their market share.”
Alok’s colleague Simon Kleine – head of client services at East & Partners Europe – pointed out that while UK businesses have reduced their spot FX volumes by more than one third over the past four years, they remain highly exposed to currency fluctuations amid increased volatility stemming from the Brexit vote.
“The vast majority – around three-quarters – of small businesses exclusively use spot FX solutions for their foreign payments,” he said.
“However, there has been a slow, but consistent growth in the use of hedging FX products by small businesses in the UK in the past few years, as [they] seek to reduce their exposure to this FX risk.”
Kleine added: “Considering recent, record drops in the [value of the] pound, the question is now, how quickly will the majority of small businesses in the UK move away from spot FX to hedging FX products to reduce their FX risk?”
Commenting on the findings to online finance journal Euromoney, Stephen Baseby – associate policy and technical director at the ACT – cast doubt on the value proposition offered by alternative providers.
“I’m not convinced non-banks offer FX services cheaper than banks,” he said. “It may appear cheaper at first, but once you factor in the additional costs, the difference can disappear.”
A narrow range of service, he explained, was also an issue: “Many corporate FX needs involve forwards, and that requires credit. Banks can take that forward risk and build a credit margin into the price – but that arrangement is not typically available from within the shadow-banking system.”
Baseby also noted a potential hurdle for non-banks if they decide to broaden their appeal by extending credit lines: they would have to comply with the same capital-adequacy rules as banks – and shoulder the related costs.
“Corporate treasurers themselves are very aware of counterparty risk,” Baseby added, “and will have concerns about dealing with institutions that are not fully regulated.”