Twenty-five years ago, when I entered the foreign exchange market, foreign exchange was an elitist game, reserved for the world’s biggest banks and the larger regional banks, who could afford the high cost of entry into these boulevards. The proficiency and the time needed to run FX in-house was absurdly high, deterring smaller banks from experimenting.Back in the 1990s, making a $10,000 foreign currency wire payment for a commercial customer did not make sense for the bank offering foreign exchange. At the time, a salesperson or an operations person would have to manually take the payment details over the phone and input those details into the banks’ FX system. Any errors in routing or account numbers were time-consuming to fix. This meant that even larger margins didn’t justify the time and money spent to offer FX to these smaller commercial customers, directing the customer to “just send dollars”.The early 2000s saw the larger banks leveraging technology to help their customers with web applications to directly manage their payments. This gave customers greater transparency and control of their payments, while also reducing the many telephone calls and glitches associated with manually processing payments.At the same time, banks were creating the idea of sub-accounts to their global network of foreign currency accounts; these accounts are generally called “multi-currency accounts,” or MCAs. This allowed their customers to effectively purchase a block of foreign currency and then make payments as needed using their preferred currency, putting even more direct control in the hands of their customers.The large banks made inroads into the FX space with powerful technology, leaving the smaller banks in a stew. The amount of in-house technological know-how required to build and keep these systems up and running was disproportionate to the capacity of the smaller banks, temporarily raising the barriers to explore into the FX opportunities.Gradually, larger regional banks, through investments, capitalized on the capabilities offered by software companies. However, those regional banks still had the obligation to host servers, load software, manage upgrades, conduct full end-to-end tests, and deal with outages themselves.
Fast forwarding to today, even the smallest of banks can offer foreign currency payments with relative ease. For example, many small banks take advantage of the end-to-end capabilities offered by Finzly’s FX Star. Banks enjoy a fully hosted environment, where we set up the system, manage the software, help troubleshoot any issues, all at a very reasonable cost.
With practically no market risk, banks are presented with reasonable choices to enter into the FX market, giving them the freedom to choose according to their internal dynamics. Three such models are presented below:
