The big banks caught trying to manipulate foreign exchange rates have got their comeuppance, with hefty fines imposed by UK and US regulators. And this, coupled with the complexity and lack of transparency around bank traders' charges and fees, is presenting smaller forex operators with an opportunity to capture a share of the market.
As markets go, foreign exchange (FX) is huge, with $5.3 trillion worth of currencies traded daily; $80 billion of that by SMEs changing currency between the countries with which they trade.
Until recently, SMEs have had little choice in terms of where to go, other than to the banks, but now it seems a different FX model is emerging in the FinTech sector, led by some innovative start-ups looking to give the banks a run for their money.
One of them is Kantox, a peer-to-peer technology trading platform that enables SMEs to trade FX themselves, bypassing the bank traders and their fees. Co-founded in 2011 by Frenchman Philippe Gelis, the business grew 900% in 2013, and is set for triple digit growth this year.
Although he is based in Barcelona, Gelis chose to launch Kantox in London, a city whose sophisticated financial history and regulatory credentials have made it a magnet for FinTech start-ups.
Gelis had always harboured entrepreneurial ambitions, but after graduating from business school pursued a six-year corporate career with Deloitte. It was here, while working with Kantox co-founder Antonio Rami, he acquired a business client who worked extensively with FX and was paying huge spreads on each trade.
"We tried to help them negotiate with their bank, but soon realised this was complex and expensive," said Gelis. “It became clear to us then that the FX industry was completely inefficient and ripe for innovation. Kantox was built to bring transparency in FX to an under-served sector of the market.”
In 2010 they took part a 54-hour start-up competition, Start-up Weekend, where they met their CTO and formed a team, and the following year, won another start-up contest, OMExpo
“That was a sign that people believed in our company and my business partner and I finally decided it was time to quit our jobs and launch the business officially,” says Gelis.
They raised a further €150,000 from family and friends, and became FCA (Financial Conduct Authority) regulated, enabling the business to get off to a flying start. In February this year Kantox secured a €6.4 million investment from leading VC firms Partech Ventures and IDinvest Partners.
Gelis said: “We now have over 800 business clients, mainly SMEs, with revenues ranging from around £5 million ($7.8 million) to £200 million ($314 million), but we also have mid-cap clients with revenues in excess of £1 billion. The largest single transaction carried out by a customer was $21 million earlier this year and we are on track to hit our target of $1 billion worth of transactions by the end of this year.
They say that over 75% of their clients are able to save more than 80% compared with what their banks or brokers previously charged them.
“We charge between 0.09% to 0.19% commission per transaction," says Gelis. "On average, banks charge between 1% and 2% upwards. The worst we have seen at Kantox was a 3.39% charge that one of our clients received by their bank in hidden fees on a transaction."
With this, and the fines levied by regulators on the five banks for FX manipulation, comes a very real opportunity for FinTech players in this space to bring transparency and simplicity to a market that has always been dominated by the banks.
Ron Finberg, editor at Tel Aviv-based FX think-tank Forex Magnates, organisers of a major FX and FinTech summit in London next week, said: "Feedback from SME users of non-bank FX transfer providers has shown that once they get over the initial hesitance of doing things differently and trusting the non-bank platform they are very satisfied with the results.
“Our opinion is that as this market grows and becomes more legitimate in the eyes of the SME's, it will become a serious competitor in terms of market share to traditional banks, with banks themselves reacting and decreasing their fees.”
