Multi-Dealer Platforms Have Annihilated Profit Margins and ‘Commoditised’ FX

The only way for banks to recapture value is through leveraging automation technology, says fast-growing fintech Kantox. Multi-dealer platforms (MDPs) such as 360T and FXall have probably been the biggest innovation in the corporate FX space in the past 20 years, enabling corporate treasurers to compare prices from different banking partners in real time and then select the best offer. These platforms have been extremely smart in designing their business model. They decided from the get-go to request a ‘brokerage fee’ from the bank winning the deal, instead of charging their corporate clients. Although these businesses have brought along advantages, their arrival also threw up some challenges. Many leading banks in the FX space were not really interested in joining the new MDP venues to compete for the best price. The direct consequence for banks has been a race to zero of sorts; a massive compression of FX spreads for vanilla products and an erosion of revenue streams that were previously easy to capture. In response to the threat posed by MDPs, banks have been focusing on more complex products, such as options. While this is still a profitable business, many corporate clients have a limited appetite for these. Banks have also been developing complex technology solutions for specific needs, for example algorithmic trading, to smooth FX execution on large trades. Additionally, they have created simplistic products such as guaranteed FX rates. While these are easy to use, they negatively impact firms’ price competitiveness due to the fact that they involve a markup with many limitations and lots of fine print. The reality behind guaranteed rates is that they do not require any kind of technology development and can be built on top of banks’ legacy FX platforms. This is also the reason why many banks are now moving in that direction, instead of trying to build unique FX technology from scratch, which addresses the real client needs. All these initiatives have leveraged bank infrastructures, balance sheets and organisations to try to mitigate the revenue erosion caused by MDPs, although none of them were really focused on bringing highly differentiated technology and value to corporate clients. The common factor here has been the shift towards products and services that made pricing comparison difficult. With the benefit of hindsight, MDPs were essentially a technological disruption in one part of the FX cycle and it was always likely that other areas of corporate FX would be affected by tech advances. As part of our roadmap, connecting our Dynamic Hedging solution to MDPs was always a must. We started talking about that idea in 2015. Until recently, most of our clients were SMEs and mid-caps with revenues up to €2bn, to which we were providing FX liquidity. In other words, we were the counterparty to the FX trades, sourcing our liquidity from major banks. With the announcement of several bank partnerships (Silicon Valley Bank in the UK, BNP Paribas in EMEA and Citi in the US), we’ve opened a whole new distribution channel. The banks’ corporate clients now gain full access to unique technology while obtaining their FX liquidity directly from their bank or a pool of banks via an MDP. In a nutshell, there is an intelligent software layer between the client (ERP) and the bank (FX liquidity). This new channel has been an opportunity to better understand the value created – and the value destroyed – by MDPs, and how extra value can be created on top of the existing set-up. In all the conversations we have had, in general corporate clients are happy to pay for end-to-end automation in their quest for better FX risk management and for greater efficiency. They understand there is much more value to capture there than by saving an extra pip on the spread. Unfortunately, during the past two decades, the whole industry has focused on lower prices instead of extra value. It’s time for a change.  

 In this example, the set-up has no impact on the banks’ existing revenues, as they are still providing FX liquidity to the client.