P2P foreign exchange websites set to change UK retail currency services

Online currency conversion is set to change the UK retail currency system on a grand scale within the next decade. Peer to Peer (P2P) foreign exchange platforms and equity crowdsourcing are challenging pre-existing financial services and taking a large market share from the industry.

P2P foreign exchange websites provide customers with a cheaper option because their rates are crowdsourced and only charge a flat commission of about 0.5% per transaction, in comparison to banks which usually charge up to 5% plus a transaction fee.

Banks claim to offer customers a better service which is more secure, however, this is becoming less important to customers seeking the cheapest exchange rates. TransferWise, the biggest P2P money transfer service is running a ‘stop hidden fees’ campaign which claims to enable customers to avoid the overpriced rates that banks are offering.

Taavet Hinrikus, the CEO of TransferWise said the P2P company was established “out of personal frustration,” because he realised he was being over-charged by banks. “As an expat from Estonia I was always changing currencies and realised the banks were giving me a really poor deal.”

Hinrikus said that “only 0.01 per cent of the total global market” are on board, but the company are planning to transfer their London-based operation to the US after a $58m funding round led by Andreessen Horowitz, the venture capital group which previously backed Twitter, Facebook and Airbnb.

Valar Ventures, a venture capital firm which also led a $6m investment round for TransferWise last year and Andrew McCormack, a partner at the company, agree with Hinrikus and said that “retail currency exchange is one of the areas in consumer banking where customers are getting ripped off the most egregiously.”

The online P2P currency exchange market place, CurrencyFair, estimates that P2P foreign exchange will provide £250bn of currency transfers by 2017 and the market will grow at an annual rate of 500%.

CurrencyFair, who claim to have saved their customers $135m since starting their business five years ago, has enabled holidaymakers and expats to transfer around $2.5bn at a fraction of the cost charged by banks. In the future, CurrencyFair are seeking to attract customers from Australia’s four largest banks, by offering cheaper transfer charges than the 5.5% charged by the banks.

Brett Meyers, the co-founder of CurrencyFair stated that people “don’t realise what rates they are paying to the banks” as margins are built in and believe that they are receiving “free banking.”

According to Meyer, Australian banks are able to charge more because trust in the financial sector is not a problem, unlike in Europe. He said that “Australia never had a banking crisis” and the “sector is not just tech driven, it’s consumer driven. In Europe the crisis lowered trust in banks and allowed them to consider an alternative because they were so fed up with the status quo.”

With multimillion-dollar funding, CurrencyFair will attempt to double staff at their Newcastle headquarters which will enable customers to use their CurrencyFair account to buy goods and services more easily. For example, a customer will be able to pay for a hotel room in Hong Kong using their account in HK dollars without having to pay credit card charges.

Industry experts believe there are some negative aspects to the move from traditional financial services to crowdsourcing forms of currency conversion. According to Simon Champ, chief executive of investment firm Eaglewood Europe, a firm which invested in P2P rival Betfair, small-size transactions are the most vulnerable to disintermediation and companies earning high margins are not motivated to compete with new technologies because they have now become a threat.

In the UK, the Financial Conduct Authority (FCA) is responsible for regulating P2P foreign exchange companies but some believe that a number of uncaptured cyber risks could escape when allowing people to offer and choose their own rates. However, TransferWise may have eradicated this possible cyber threat by sticking to a midmarket rate rather than a ‘market place’ where people bid for different exchange rates.

According to the FT, Mike Laven, CEO of Currency Cloud believes that P2P foreign exchange provides more transparency than banks. “Peer to peer foreign exchange is all about the transparency for the consumer, which money managers don’t always offer.”