Foreign Exchange Rate Integrity®

Who Costs Your Firm More?

Your bank's FX markup, or your own indifference?

By Jack Borland, Managing Director, Foreign Exchange · Blades International, Inc.

Every other cost in a banking relationship arrives as a number you can review. Credit pricing is documented. Cash management fees are itemized and billed. Foreign exchange is the exception: the cost is built into the rate itself, it never appears on a statement, and no one at the bank is required to tell you what it was.

That is why FX markup can go unexamined for years in otherwise well-run treasury operations. Not because the number is beyond anyone — because nobody has been handed the job of asking for it, and a bank prices to the pressure it is under.

The headlines are not your problem

Governments in the US, the UK and elsewhere have levied enormous fines against the world's largest banking organizations for manipulating the London fixing in the most important currency pairs, and state regulators have since added their own claims. It makes for good reading. Oddly enough, it has little or nothing to do with how a commercial firm actually gets priced.

The custody-bank cases are the ones worth your attention, because the root cause was different. There, the bank simply failed to deliver the FX rate environment its own contract promised on automated transactions. No fixing, no cartel — a contracted standard that went unmet, trade after trade, in plain sight.

And it came to light only because a whistle-blower brought it forward. The administrators of the pension funds involved, each of them responsible for more than a billion dollars, had never bothered to check the FX rates applied to their own trades.

That is the lesson. A billion-dollar fund was overcharged for years because no one looked. The exposure was not the bank's conduct. It was indifference.

What is actually pushing your rate up

Three things, and only one of them is about misconduct.

Margin pressure inside the bank. FX desks are carrying heavier profit targets than they were a decade ago. The straightforward way to hit them is to raise markups quietly across the whole client book.

Compensation that rewards it. Payout percentages to sales and trading staff have been cut, and headcount is managed against gross-profit tallies. That adds a personal incentive to hold a wide spread on an account that has never asked about one.

Client indifference. This is the largest of the three by a wide margin. A bank prices to what a client will accept. If a company has never asked how its markup is set, the bank has no reason to sharpen it — and every reason not to.

Banks widen FX margins across the board where they can. But the biggest contributor to a high markup is the client's own indifference, or a simple lack of understanding of their pricing structure.

Two markets, one product

Large corporations with dedicated FX staff keep their major transactions honest by putting them out to multiple bidders, directly or through an auction trading platform. Those trades get competitive pricing because someone competent is using an auction system.

The same companies then run their smaller payments straight through the cash management system, unsupervised, at whatever rate is applied. Individually, none of these amount to much. Annually, they add up to significant savings opportunities.

Smaller companies and commercial entities face a harder version of the problem. Without the budget for dedicated FX personnel, there is no way to apply competitive pressure — and no basis on which to challenge the bank when it explains why the markup has to be what it is.

Leaving your bank is usually the wrong fix

A number of non-bank FX services have grown up around this frustration, and most of them market themselves on freedom from the banking system. It is worth remembering that they earn their money the same way — inside the rate — and they still need a bank to move your payments.

Moving your FX activity away from your bank will damage the relationship, and that relationship is usually worth more than the savings. Running a cost-efficient FX program with your existing bank is not difficult. It requires time, market knowledge, and someone to hold the arrangement in place once it is agreed.

Markup is negotiable. Treat it that way.

Almost every bank providing FX services has to mark up the interbank rate. That markup covers the cost of delivering the service and produces a profit. There is nothing improper about it.

What is improper is treating that number as fixed. It is a term of business, and it belongs in the same category as your credit pricing and your cash management fees: something you negotiate, document, and then verify.

Blades International determines the markup structure your bank is applying today, negotiates a materially better one — documented as a pre-agreed spread agreement — and then monitors the trades to confirm the bank is honoring it.

Our clients get the benefit of a combined treasury and FX payments department at a fraction of the cost of building one.

Your bank already has the technology

The systems needed to cut the bank's operating cost, give you a secure and convenient way to purchase and distribute currency, and fix the markup at a defined amount per transaction already exist — inside your bank.

Our approach uses that existing infrastructure of algorithms. In most cases that means savings on every future transaction while the banking relationship stays intact, with none of the disruption of a migration to a new bank or platform. On the rare occasion a bank will not move, we introduce one that will and manage the transfer of your FX and related services.

The last step is the one that lasts: making sure that from this point forward, your pricing is verified rather than assumed. That is Foreign Exchange Rate Integrity®. See what that has meant for our clients in the case studies.