Thu Sep 29 2022

FX Brokers vs Payment Platforms

There is very little brokers do that cannot be automated. Perhaps a bold statement, but a truthful one nonetheless. With modern technology, the days of calling multiple currency brokers to negotiate the best rate are far behind us, as is the idea that they have an innate ability to predict and protect you from large currency fluctuations.

Foreign exchange is a reactive game. Hedge funds, banks and investors are unable to consistently predict market movements, and traditional currency brokers are far behind them in terms of understanding the markets themselves. News and data used to help you forecast and capitalize on rate movements are usually priced into the markets long before they pick up the phone to tell you about it, and in a large number of cases, the only purpose it serves is to influence your decision to purchase currency through them in large quantities. After all, it’s a sales role.

In this article, we look at the functions of an FX broker, and where automation and online alternatives prove to be superior.

Securing the best price on your currency conversions

The Broker

The fundamental purpose of an FX broker is to get you the best price (i.e. the lowest margin) on your currency conversions. Brokers will access wholesale exchange rates from the large banks, and then apply their markups before brokering the trade to you. As an example, the interbank exchange rate might be 1.3550, with the wholesale being 1.3545 and your exchange rate being 1.3440.

The broker will access multiple liquidity providers and select the best wholesale rate, he will then call his customers to offer the rate with his markup included. On the customer side, he/she will then call multiple brokers in search of the best price.

This option is time-consuming, unnecessary and at times more expensive. This is because the broker can take advantage of the phone call to gauge how much of a margin they can get away with taking.

Automation and Online Alternatives

With so much competition in the market, this practice is diminishing day by day. Online platforms now provide the option to automatically identify and offer the best price, which involves cross-referencing the same banks as your panel of brokers. Not only that, but these platforms can display the live interbank exchange rate, offering full transparency and close-to-midmarket exchange rates. Integritas offers you a fixed 0.15% margin and displays the real exchange rate at the time of purchase, removing the need to speak to currency brokers.

Helping you time your trades and get the best exchange rates

The Broker

Brokers rely heavily on market data to influence your decision to purchase currency through them. Whilst they have access to data, it is mostly speculative and therefore relying on it is taking a risk. You might be familiar with phrases like ‘we get to know our clients’ and ‘helping you navigate the complex FX markets’ but the truth is that to make the most of your FX, you simply need access to a tool that helps you track and stay on top of currency movements - it doesn’t matter why exchange rates move, just know, in real-time, when they do.

Automation and Online Alternatives

When it comes to timing trades, automation could not be a better option. Over-the-phone brokers have multiple clients, meaning they have to call their customers at different times, compromising one over another - you can expect higher value clients to get to market long before SME clients. But what if there was a way to notify every client, instantly, when the rates move?

Instant notifications are far more effective. They are one of our most simple features but without a doubt the most popular. No sales calls or market jargon, just regular, automated alerts that mean every business knows the real exchange rate before a broker even picks up the phone. Because our margins are so low, it means that as soon as clients receive the alert, they secure the best rate minutes later, send their payments and carry on with their businesses.

Purchasing Forward Contracts

The Broker

Brokers lean on their ability to effectively manage risk for their clients, this is done by brokering forward contracts which fix the exchange rate for a fixed period of time, solidifying their margins and giving them one less thing to worry about. Because the broker’s revenues from a forward contract have greater potential, there is a higher risk that the price (margin) applied to your exchange rate will be higher.

With customer experience in mind, it can also be very time-consuming to use an over-the-phone broker for forward contracts, because you will have to overcommunicate with the broker in order to access funds and pay suppliers.

Automation and Online Alternatives

Purchasing Forwards online has a few advantages, and is complemented by the benefits of automation mentioned above (i.e. transparent pricing, instant notifications). The first is that you enjoy the freedom of being able to access your funds instantly and pay your suppliers without over-communicating with a broker.

The second is that you can form your own strategy without having to deal with broker sales tactics or market jargon that could influence your decision to hedge - removing the risk of doing so when it isn’t in your best interest. Once you understand that brokers cannot predict markets, you can remove the nonsense and keep things simple. One of the most effective ways to do so is by looking at the 52 Week Range. This will give you an idea as to what rates are attractive; you can then rely on instant alerts to capture the best rate at the right time.

The final benefit of buying forwards online is the ability to access forward rates and improve your pricing. You can find out what forward rates are here. As far as we know, Integritas is one of the only platforms to offer forward rates on every contract.

Final Points

Businesses continue to adopt automation into their workflows all the time, and this shouldn’t be any different for foreign exchange. Product-driven, online alternatives to old-school currency brokers are far too competitive, and massively outweigh the benefits of relationships. Integritas Direct is without a doubt one of the most reactive and cost-effective FX products on the market, offering a level of transparency and efficiency physical brokers can’t compete with. It is a testament to the idea that businesses no longer need a traditional FX broker.