On a recent Tuesday morning in the heart of London's City financial
district, Sakthi's firm Best FX would sell you 124 euros for 100
British pounds. Less than 20 meters along the street, the world's
third biggest trader of foreign currencies, Barclays, would only
give you 118.
The difference is a familiar one: surveys show consumers tend to
seek travel money from bureau de change booths in preference to
banks because the rates are better and Best FX are rated by a number
of consumer surveys as offering the UK's best deal.
But at a time when banks are seeking to defend themselves from
charges they manipulated the $5 trillion a day currency market, the
gap stands as a refutation of the lenders' claims that their foreign
exchange market has become extremely efficient for everyone.
The exchange rates on the board are not even the best ones Sakthi
and his colleagues give bigger or regular clients.
"If people from any one of the big firms we serve want a better
rate, we give it to them," he says. "There is enough leeway there."
It is not an accident that four of Best's six London locations are
in the financial district. Ask around in some of the City's major
currency dealing rooms and traders say they use the company for
money for business trips and holidays simply because they get more
bang for their pound.
Sakthi lists clients from some of the world's biggest banks, U.S.
giants JP Morgan <JPM.N> and Citibank <C.N>, or their UK competitors
Barclays <BARC.L> and HSBC <HSBA.L>. He also has regular custom from
workers at the brokers, IT and information providers whose
businesses feed off the banks.
"This is predominantly a City area. It is not tourists," Sakthi
says. "You have to be extremely competitive on price because they
know the market. But if you give the best rates they will stay with
you - and we have a lot of repeat custom."
Senior management at banks are nervous about how the allegations of
currency market manipulation, now being investigated in half a dozen
jurisdictions worldwide, will play out.
First, there is the potential for fines from regulators that top the
6 billion euros ($8.18 billion) they have already paid out in the
Libor interest rate fixing row.
But another reason is the possibility that the investigations will
lead to a more detailed look at the structure of a market from which
banks rake in billions annually. While most of those institutions
have moaned loudly this year about falling profits from foreign
exchange, Barclays for example made 5.54 billion pounds from all
trading last year.
HSBC, one of the few banks to break out its FX trading profits, made
$3.2 billion in 2013, almost half its overall Markets income of $6.9
At an institutional level, the currency market is highly
competitive. The spreads at which banks buy and sell euros for their
biggest clients - other banks or multi-billion dollar investment,
hedge and pension funds - are just a "pips" or hundredths of a cent.
Senior bank traders and managers regularly complain that
increasingly it is business run at a loss, or at very thin margins,
in aid of keeping key customers.
But by the time they get down to delivering that service to ordinary
individuals, the cost rises. Barclays, for example, is charging
spreads of more than 7 cents - or more than 700 pips.
Parceled up and back on the interbank market that amounts to 700,000
euros of profit for the bank on a standard 10 million pound lot.
Banks say the difference reflects the broader costs they have to
bear as crucial parts of the world's financial structure and the
risks they have to bear and manage in such huge transactions.
"Our analysis shows we are competitive against a range of different
FX service providers," said a spokesman for another UK high street
"Our FX international payments service has an extensive cost base
and the margins charged on payments relate back to the cost to
providing the service, staff, premises, infrastructure and
[to top of second column]
But speaking on condition of anonymity, officials at two of
Britain's biggest high street lenders said there are concerns of a
steady loss of market share in the retail segment.
"The truth is that the rates banks give to their customers have
never been very fully examined," one senior retail banking manager
"They are benchmarked against what our immediate competitors are
charging, how much you want to earn or position yourself in a given
segment and so on. But they are not necessarily set against all of
the places you can now exchange currency online. We do seem to be
losing share pretty consistently as a result."
After the surge of the Swiss franc drove rises in mortgage
repayments for millions of eastern Europeans up two or three times
in 2009, Polish and Hungarian policymakers began to ask why banks
were allowed to stipulate that their own rates should be used for
the currency exchanges involved.
Poland's parliament passed a law specifying that mortgage holders
could buy their own francs from wherever they liked and make the
payment themselves. Mortgage payments fell.
But most Europeans exchange only minimal sums annually, their need
for currencies limited to a handful of weekends away or an annual
summer holiday - and only then if they leave the euro zone. Those
who do notice they are getting a worse deal tend to just swallow it.
"The public really didn't get any of these big international
scandals, they haven't understood the impact on them," says Andy
Love, an MP charged with overseeing Britain's financial sector on
the UK parliament's Treasury select committee.
"Whether the commissions and costs to the consumer are
proportionate, I don't think we have really looked at that. I would
say we should. But no-one is beating down my door to indicate that
they got a lousy deal on foreign exchange at Heathrow airport."
Still, interest in how best to exchange currency is growing. Before
a lull in the past year which most cast as temporary, the global
currency market had tripled in size in just over a decade to be
worth more than $5 trillion daily.
Much of that is the result of the globalization and the ease of
communication and global trade. But it also reflects growing
interest among ordinary consumers.
"People are more aware of currencies and what their value is," says
Brendan Callan, European chief of internet-based retail foreign
exchange platform FXCM. "Sooner or later people start to say: you
know what, I have a view on that."
Back at Best in London, Sakthi says he is increasingly looking at
another bigger and complementary market in bank transfers, where he
says banks are charging current account holders such large spreads
he can beat them even when he swallows the fees the banks charge
His business is beholden to banks for a number of basic services and
he is very reluctant to criticize lenders outright. But when pushed
on the issue of competitiveness he says with a sigh that he thinks
the banks "could do better".($1 = 0.7331 Euros)
(Additional reporting by Clare Hutchison in London Editing by Jeremy
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