Corporate foreign exchange
There are multiple ways of exchanging currency. In the simplest form, foreign currency can be paid or received to and from your bank account, being denoted in local currency. In more complex scenarios, trading foreign exchange depends on corporate operational setup and bank relationships.
Receiving and paying foreign currencies directly to and from your bank account is the most expensive form of trading FX. In fact, research Just has carried out for hundreds of Norwegian companies shows that trading foreign exchange this way yields an average provider-markup of up to 10,000 ppm (parts per million). That is, for every million of currency traded, the company pays an additional margin of 10,000 units of that currency.
So, why don't businesses migrate away from foreign exchange via a local-currency bank account, and why don't banks advise their customers to do so? Well, we at Just believe the answer is twofold. First, a lack of awareness from the average Norwegian company. Second, and more significant, we believe that this business is too good for banks to be incentivized in encouraging better FX practices for their customers. The bank aggregates their customers' FX flow from thousands of incoming and outgoing payments on a daily basis, and the revenue is more compelling than if their customers were to trade FX directly through a broker. The explanation given is usually that smaller companies just don't have enough FX volume to trade with their FX desk. However, for banks with online FX trading platforms, we suspect that the real reason is that they just make too much money from the status quo.
Companies with a decent amount of FX-volume usually have multiple bank accounts in several currencies. Also, they have enough FX flow to be attractive for the trading desks and are thereby allowed to trade via phone or through the bank’s proprietary single bank trading platform. However, it is important to note that established lines to an FX broker is not enough to get fair prices on foreign exchange. Our extensive research on Norwegian corporates shows that the average applied margin on spot transactions for a given corporate can be as high as 2,500 ppm when trading through a desk.
How to make sure you have the best possible foreign exchange rates?
This question has been on many corporate minds over the years. Up until now, corporates have optimized their FX trading operation with an auction-based trading strategy, where the corporate would request rates from multiple providers at the same time, and only trade with the provider that offers the best rate. The downside of this strategy, other than the fact that it is cumbersome and laborious, is that it requires the corporate to have multiple bank relationships. Unfortunately, this is not the case for most Norwegian corporates.
At Just, we strive to make financial markets more fair and transparent. Our first product, Just FX Analytics is designed to tackle the opaque nature of corporate FX.
Just FX Analytics provides corporates with an independent third-party verification of foreign exchange trading through an easy-to-use cloud based user interface. We aggregate interbank market exchange rates from multiple world-wide FX venues, and unveil the bank’s markup even before you have traded. This way, you are in total control, and will be well equipped to access better rates.