Foreign exchange-exposed

Foreign exchange exposed:

How to find the right
currency broker
By Alex Sullivan
Commercial Director, World First

Overview
Finding the right foreign exchange company to manage your international payments
can be a tricky business. Currency brokers exist because they can make things
happen quickly and give clients one-to-one service, with bespoke products. Crucially
they also offer both individuals and businesses access to better exchange rates than
they can get at a high street bank.

If you can find a good, trustworthy broker the benefits to your business will be
enormous. However, the problem is finding the right company to work with. It’s a
crowded marketplace and financial directors are faced with a barrage of phone calls
every week from brokers of various degrees of quality, all promising the ‘best rates
available’.

So how do you cut through the competing voices and get to the companies which can
really help you? Well, honesty from both sides is definitely the best policy. The
responsibility lies with both parties to be open and straightforward from the outset.

Don’t be driven by short term prices and swayed by the ‘cheapest deal’. Most cold
callers will be happy to make nothing on the first deal simply to lock your business
down and then recoup the money by giving you progressively worse prices, moving
forward.

If you understand how the currency markets work and how the company you are
dealing with is making a profit, you will be better placed to find a currency broker who
will be able to save you both time and money over the long term.

Foreign exchange exposed
How to find the right currency broker

Introduction
If you feel that you could be getting a better price for your currency transfers, you’re
probably right.

However, if you’re looking for a legitimate plan to manage your exposure to fluctuating
exchange rates you need to look at the market with a longer term view.

It is estimated some 75-80% of UK SMEs still handle foreign payments and currency
deals through their banks. Having run a successful brokering team for many years you’d
“ It is estimated
think I would be shocked by that figure. It may be a slightly controversial thing for me to some 75-80% of
say, but I really understand why this is the case. UK SMEs still
During my time as a currency broker I’ve seen some of the problems first hand. Through handle foreign
mystery shopping exercises – a must for anyone who is serious about getting it right – payments and
I’ve been on the client side and found that the vast majority of so called ‘currency
specialists’ often make the business of foreign exchange sound far more complicated
currency deals
than it has to be. through their
banks…”
With this in mind, I would suggest that the biggest difficulty for people who are thinking
about trying a specialist foreign exchange company (rather than sticking with their bank)
is cutting through the sales patter and getting to the truth.

We are talking about managing your hard earned money after all. This is money that
belongs to your business, you should be cautious. In fact, what scares me is the number
of businesses that don't check how they are protected if the company they are dealing
with gets into financial difficulty. You need to know what measures are in place, and be
prepared for what to expect in the unlikely event that something goes wrong.

I’m going to go a through a few relevant points in this whitepaper in an attempt to help
make the process of finding the right foreign exchange broker that much easier. There
are a few simple things you should know about the industry which will help guide you to
make the right choice.

So let's start at the beginning… this is the toughest bit.

Every broker says they are the cheapest.
Yup, I'm afraid most brokers will start any initial contact by saying they are the cheapest,
but most will quote very similar rates at the outset. On the first call I don’t think it is unfair
1
to say that it’s common practice for you to be quoted prices at the interbank rate , the
rate at which banks and brokers deal themselves. Not all brokers operate like this, but
lots of them do.

This is also partly down to the client’s demand and their tendency to focus on price over
service. Simply put, most people who are new to the industry want to get the cheapest
rate at all costs, and if someone quotes a real rate they are less likely to win the
business.

1
The interbank rate is the exchange rate at which commercial banks trade currency with each other, usually in amounts over
£5million, and, as a result, the rate is not available to the general public.

Page 2 of 6


But nothing in life is free. When you come to transact, some margin of profit will be built
in. If it isn’t, you should be wondering how profitable the company that you are dealing
with actually is. The last thing you want is to be letting a company which is not profitable
manage your money.

So there is often a certain amount of ‘cat and mouse’ about how this initial contact
between both parties is conducted. But it is not constructive to try and hide your
intentions from one another excessively, and it will only serve to cloud your judgment. It
is far better for clients to understand how banks and brokers make their money. Once
you know that you can check you are getting a fair deal. “ Most brokers will
start any initial
contact by saying
How do banks and brokers make money? they are the
Banks and brokers make their money in the same way. Despite what anyone tells you, cheapest…”
there is no clever trick.

‘Aggregating deals’, ‘using buying power’, none of these things are really true, it’s all a
myth. Banks deal at interbank, brokers buy at a very small margin from that rate. And
anything on top of that is the profit.

Let's say the GBPUSD interbank rate is 1.55 (where the banks are trading), a broker will
buy or sell at 1.5498/1.5502 roughly. If the broker is very small they will get a worse rate
2
which does affect you, but the reputable firms will be trading at much the same rate.
The bank and the broker make their money by marking up that rate and taking the
difference, so 1.5450/1.5550. This is generally known as a spread.

Of course, the less of a margin the better it is for you, BUT be wary of accepting no
margin at all. Ask them why they would give you a deal for free? Whilst it might seem
good at the time do you want to deal with a business that doesn’t make any profit? They
may be doing this in the short term, but it won’t be sustainable.

The problem is that in our relentless pursuit of the cheapest deal, sometimes, as
customers we are all guilty of muddying the waters when it comes to the long term
picture.

When it comes to the business of foreign exchange, I’m going to suggest that some of
the responsibility lies on the client’s side… sorry everyone!

For example, if you are looking to secure the best rate so relentlessly it’s possible, nay
likely, that you’ve got a competing set of brokers so worked up that they’re prepared to
make virtually nothing in order to get you to sign up.

This is all well and good, in the short term. But my point is that it won’t end up working
for you in the long term, as the same broker or bank starts looking to recoup this initial
loss by increasing the spread.

It is not uncommon for the margin of profit to change quite drastically the more deals you
make.

2
The 3 biggest foreign exchange firms in the UK are World First, Travelex and Moneycorp.

Page 3 of 6


The best thing to do before you commit to a broker is take a closer look at their business.
Look for references from long term clients, satisfied customers who have been happy
with the rate and service for a long period. It also pays to check out the range of
products that are available.

The value of good products and service
“ Despite what
3
When you buy a ‘forward contract’ the rate can be better or worse than the rate on that
day that the contract expires. It is not uncommon for a wider margin to be worked into a
forward contract owing to the added risk involved for the FX provider. It is reasonable,
anyone tells you,
where risk is taken, for the broker to add some additional margin, but, make sure you are there is no clever
getting a fair deal and that additional margin is not being built in just because it’s harder
trick…”
for you to check.

Many of the bigger foreign exchange companies are also now authorised to offer
4
products like ‘currency options’ and other flexible products that will add value and help
you manage your exposure to the volatile currency markets.

Furthermore, some brokers have great online systems and things like direct debit
facilities, but lots don’t. All of these features will combine to save you time and (crucially)
money in the long run.

In my opinion getting a fair deal from one of these brokers is better than a free deal from
one that doesn’t have these products in place. Even if you don’t use these flexible
5
products initially, and choose to book a spot rate at the beginning, you may require a
change of tactic at a later date and it’s very handy to have the option there at your
disposal.

It will also mean that the company you are dealing with should employ people with a
deeper and more sophisticated understanding of the markets. Everyone needs an expert
on their side. But be warned, anyone who tells you that they know what is going to
happen in the future is lying to you.

No one has a ‘crystal ball’ and the exchange rates are entirely unpredictable. Anything
from natural disasters to political upheaval can lead to change in the value of currencies
and nobody knows for sure what is going to happen from one week to the next. With that
in mind, beware of anyone who is giving you a ‘mystic Meg’ style analysis of the rates.

However, a good currency broker who operates with integrity can add so much value to
your business. Correct hedging with smart products could save you up to 20% in a year,
which goes straight on to your bottom line.

As far as service is concerned, everyone says they give great service and some
companies really do. Working with someone who will actually take the time to look after
you is worth its weight in gold when you are trying to manage something as volatile as
the currency markets.

3
A forward contract is when you fix an exchange rate in advance.
4
Hedging with currency options allows you to protect your bottom line against fluctuations in exchange rates. Even better, you can
also benefit if rates start to move in your favour. Options fall into two basic camps – one where you pay a premium, or fee, up front
and one where you don’t pay any premium, but accept a slightly lower rate.
5
A ‘spot rate’ is the exchange rate to transfer on the day.

Page 4 of 6


The best thing to do is to get references, as many as possible. If you look on LinkedIn,
for example, the bigger more reputable companies will have recommendations available
to view online. And there are other ways of checking the credibility of any claim to ‘offer
the best customer service’, don’t be afraid to ask them for client testimonials, go to their
website, or go online to Review Centre to see what people have had to say.

Watch out for suspect credit lines
“ The question is;
Some brokers offer credit lines to businesses for forward contracts. If this is done in a
measured and sensible way it is totally fine. However, there are risks, and it has become
what can clients
a little more common for some smaller brokers to offer credit lines beyond their financial and companies do
capabilities.
to clear the way
Corporate clients often take credit lines because it’s seen as ‘free money’, but of course for a transparent,
it isn’t. And keep in mind that you are not the only client they are going to be offering a mutually
line of credit to that day.
beneficial
A sensible credit line should have a profit versus risk ratio clearly worked out. In short, if relationship?”
your trade is cheap (or even free) and there is an element of risk involved, then you are
at risk. To avoid this assess the provider’s balance sheet and make sure they are
financially stable with legitimate assets.

The rules should be based around how much the company lends versus how much it
has in the bank. If you are being lent £1m by a broker that has hundreds or thousands of
clients and has £200,000 in net assets - how can they afford a default? If they go bust
what regulation do they have to protect you?

Any company offering credit lines should have rules around what they can lend
depending on your net assets, profitability and other financial factors. Again, there are no
‘magic tricks’ here, if you default, if you run out of money, then they are going to be out
of pocket. The same rules apply to their other clients which means it affects you.

Page 5 of 6


And finally… Security is crucial
Security is also another important thing to check thoroughly before you enter in to an
agreement with an FX provider. Firstly, find out what FSA regulation they have in place.
Any attempt to avoid answering this question should set the alarm bells ringing. A
company with a secure bank balance will have no problem giving up this kind of
information.

Make sure they are an ‘authorised payment institution’ (PI). This is different to a ‘small
payment institution’, and your protection is weaker with a small PI. In this regard, PI
status is very important. It regulates how money is held and gives you assurances about
the safety of your money should something go wrong.

You can also check their balance sheet and if you don’t have access to a credit system
ask for their accounts. Other questions you should consider asking might be: Do they
have a track record of being profitable? Do they have net assets? When were they
incorporated? How are they audited and what measures do they have internally to
protect you?

You should take security into account along with service, pricing and everything else you
want from a broker. It seems obvious, but so many people don’t think about these things
and then may not end up with the best provider overall.

So, as you can see, there are lot of ways that you can take some of the confusion about
using a foreign exchange broker out of the equation. The biggest problem with the
market is that there are companies out there making the whole business sound more
confusing than it actually is.

There are lots of brokers out there, but if you choose wisely and find a really good
foreign exchange specialist to work with it can make a really positive impact on your
business and your bottom line.

---

Alex Sullivan is Commercial Director at World First

He says: “When I started the Corporate Desk at World First I had one aim, to bring excellent service
and transparency to the financial services industry; having worked for other brokerages I noticed
these crucial aspects were missing because of their short term outlook.

“The Corporate Desk started with one phone and two people. This team now stands at 40+ people.
I believe great businesses are about hiring nice people and teaching them the necessary skills to be
great at their jobs.

“If you can build a team with the right skills, who value their clients and who look to build long term,
transparent relationships with them, then they will be successful.”

Contact Alex via email on LinkedIn or follow him on Twitter

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