It is 11:00pm on a weekday night. A small business owner in Hong Kong has just completed a successful transaction to pay his Polish vendors tens of thousands of Euros at a competitive rate. Pretty routine stuff these days, so what is the big deal? The really big deal is that the business owner did not use a bank’s service for his cross-border payment. In fact, he didn’t even consider a bank in the first place!
Yet not too long ago, the only place where your regular Joe or Joanne business owner could exchange foreign currency and make foreign payments was a bank. Now, with the advent of faster digital technologies and ever-increasing globalization, peer-to-peer online brokers have stepped up to fill the demand for cheaper forex services. They have managed to turn customers’ initial interest in cheap rates into real customer loyalty by championing the cause of financial transparency and disclosing their own fees and commissions. In the very near future we can expect customers to demand the same product offering transparency from banks as well.
The wake-up call for banks is loud and clear: Peer-to-peer forex, with its slick algorithms and online convenience, will disrupt your business with the potential to hit you hard.
To stay in the game, banks cannot overestimate just how much customers dislike the existing forex model. Browse through the reviews on TrustPilot for peer-to-peer online websites and it is overwhelmingly clear why peer-to-peer forex brokers are popular: customers just want a better rate. And vendors such as Midpoint, CurrencyFair and Kantox are able to offer these rates not least because they have no offline presence and no sales staff to sustain.
Automated peer-to-peer algorithms match buyers and sellers quickly with just a few clicks. For those who prefer a more manual approach, some vendors offer a virtual marketplace where buyers and sellers can match orders without the intervention from a third party. This idea of “customer agency” promotes direct participation in the service, participation that in turn relieves customers of additional charges. By contrast, a bank usually has to consider budgeting for advertisements or other incentives to build awareness and incentives to get customers to use their services.
This is not the only instance where insightful knowledge of customer behavior leads to significant rewards. Another unique selling point of the alternative forex services is the notion of fee transparency. On almost all peer-to-peer forex websites, fees are disclosed in a user-friendly fashion. This transparency enables customers to shop around for better rates, rather than be tied down to the same provider who holds their bank accounts.
Thanks to the revelations from large-scale whistleblowing events such as the so-called “Panama papers”, together with scores of Anti-Money-Laundering investigations, customers are increasingly aware that there is a lot more they still don’t know about their banks. Whether driven by suspicion, or by frustration with current banking processes, a small but growing segment of customers have decided to opt out and pursue alternatives for their banking needs.
As events such as these become the norm, the greater the expectations placed on banks to harness technology and provide a cost-efficient service. As an example, a study of GE Capital Retail Bank shows that 81% of consumers do online research before making purchases. So why then are the banks still hitting customers with expensive fees on forex? These customers, literally, are not buying it.
If current market practices by banks were a true indication, you would think there was no urgency to review and react to the arrival of these peer-to-peer competitors. We beg to differ.
In the short term the market visibility of peer-to-peer lending (such as LendingClub) will continue to change the market climate by leading investors and customers to look at the next big things to disrupt the financial industry. Long term, regulators may also have something to say about the transparency of forex fees. But in any case, reacting promptly to customer sentiment is the key to staying in the game. Here is how banks may stay competitive in countries where peer-to-peer forex brokers are in the market:
a. Banks may decide to invest in and/or co-brand with the peer-to-peer players: in the case of CurrencyFair, they have worked with a bank in Ireland to allow customers to make transactions using their debit card. This may be the likeliest scenario when the service goes mainstream, as there will be a demand for money changers/forex booths for individuals outside of the Internet.
b. Banks may decide their efforts are better served on educating customers on payments regulations and the existing safeguards put in place for protection instead of directly competing with these peer-to-peer players. This approach would satisfy regulators and customers who would appreciate greater transparency with forex services, but will not work to win over cost-conscious customers.
Whatever happens next for peer-to-peer forex brokers and upcoming industry disruptors, inertia and inaction are not options for banks. Transparency, convenience and value for money are forces that are too powerful and too attractive for customers to ignore. Customers will continue to make their voices heard by choosing alternatives over traditional banking, and those who ignore their needs will inevitably lose out.
Alec Mok is a Consultant at Capco’s Hong Kong office, with experience in transformation and technology for MNC clients. Accustomed to changes from his diverse background in data, business strategy and technology, he is passionate about bringing innovation to organizations.
Kay Muhammad is a Senior Consultant currently focusing on regulatory governance and remediation projects in the insurance space. Previously Kay implemented IT governance framework for regional investment banks and led process improvement projects in retail banking.
The content and opinions posted on this blog and any corresponding comments are the personal opinions of the original authors, not those of Capco.