Jonathan Potter is the co-founder and director of CurrencyFair, the world's first peer-to-peer foreign exchange marketplace. The online platform (www.currencyfair.com), which started in May 2010 and has grown to register €20 million (Dh92.1m) in transfers last month, aims to save users thousands in hidden fees and unfavourable exchange rates.
Why did you set up CurrencyFair?
Brett Meyers, CurrencyFair's managing director, had a bad experience with a bank money transfer when he emigrated from Australia to Europe. When he checked his balance, he was stunned at the shortfall and worked out the cost of the transaction. It had cost him several hundred Aussie dollars. From that day on, Brett always tried to exchange money directly with fellow expats using the midpoint rate. With this method, he was also able to avoid the transfer fees. This was effective, but not 100 per cent efficient and Brett needed a way to bring more people to his "marketplace", allowing him to exchange more currencies for the amounts he needed.
Are you regulated?
One of the key barriers to entry was regulation. Foreign exchange businesses in Europe are regulated by the appropriate local body, such as the Financial Services Authority in the United Kingdom and the central bank in Ireland, under the European Union Payment Services Regulations (2009). CurrencyFair was to be regulated as an authorised payment institution with the requisite requirements of ongoing capital and segregation of client money. It took about 12 months for the business to be approved and CurrencyFair was ready for business in May 2010.
How does it work?
It's as simple as Brett's original marketplace. Customer A has dirhams and wants British pounds. Instead of going to the bank, they register with CurrencyFair. They then send us their dirhams - all customers send their money before exchanging, which means there is no risk of a matching trade not being honoured. Once we have received the dirhams, the customer has two choices: to use QuickTrade and accept the best available rate from customers wanting dirhams and selling pounds, or to use the MarketPlace, where they can set their own rate and wait to be matched.
What are the advantages of using CurrencyFair?
The average customer, regardless of the transaction size, pays about 0.3 per cent of the amount exchanged and transferred. In some cases, customers can achieve a better rate than the midpoint rate. CurrencyFair customers are exchanging at rates usually only available to multinationals and money market professionals dealing in millions, no matter how small their transaction.
Why are there such discrepancies in what banks charge customers to send their money offshore?
Banks rely on the fact that people can be lazy when it comes to switching financial services providers. Apparently, you are statistically more likely to get divorced than change bank accounts. They also hide a large proportion of the cost.
How do banks get away with the lack of transparency when it comes to remitting money?
The lack of transparency in fee structures makes it enormously difficult for consumers to find the best possible deal. When banks trade with each other, the exchange rate is the midpoint rate. This is the wholesale price for currency and is not available to retail customers. Banks and brokers add a mark-up to this rate, much like a retail shop marks up the wholesale price of the goods it sells. In banking terms, this is called the "spread". Banks and brokers always price discriminate and some build in a transfer fee as well as commission into the rate, while others may add a transfer fee after the rate is agreed. Such practices make it unclear to retail customers as to whether the quote given is a fair mark-up of the midpoint rate at that point in time. Many people think banks or brokers that advertise commission-free transfers are providing a fantastic offer. In reality, commission-free means "hidden in the rate".
Why does it take so long for your money to arrive at its destination?
Remember when it used to take three days for a cheque to clear? Banks now proudly tell us a cheque will clear the same day. That's because most money is now transferred electronically and there's no money to be made on a delayed cheque clearing. But there is money to be made on delaying electronic transfers.