Thinking about engaging or changing the foreign exchange company you use for your personal or business payments? Here are 7 things to consider when assessing both their competency and their integrity, and why it matters.

We're conscious of the fact that those who might find this post interesting will probably

already know about the benefits of a broker. So, for that reason we'll go more into the whys of these questions than explaining the minutiae of the terms being used. Anything doesn't make sense or you'd like to discuss some of the points we make then do call our team on +44 (0) 2031728193.

1. Do they quote you a rate before you have formally registered with them?

Your broker does not have a pot of money sitting in an account that, once you register with them, they will make available to you. They have to buy in the foreign currency you wish to send and they do this using the currency you currently hold, but, the rate at which companies 'buy-in' euros, dollars etc. varies depending on what the global FX market dictates, what their primary supplier charges and both when you need the money at its destination and the date on which you intend to settle your booking with them.

A company prepared to 'quote' you a rate before they know anything about you is not a bad company, however, they should emphasise the fact that their quote it purely indicative of the sort of rate you might expect once you are in a position to accept it.

There is absolutely no guarantee that you will get the rate they quote you once you are their client and this is because either the underlying market value of the currency you wish to buy has changed or they are not including their own mark up in that indicative quote.

Hence, you are not getting a fair or accurate idea of how competitive they are prepared to be.

The dealer you're speaking with either just wants to get you over the line as a registered client and so inflates the level of competition they offer, or, they give you a fair idea of their typical margins. Either way, depending on the size and structure of the actual company you're speaking with you will likely find a distinct difference between a pre-registered quote and a post registered quote.

The reason why it is best to do the registration with a firm is because, having done so, your dealer will be aware that your trading with them is on a knife edge. He and his compliance team have done the work to make sure you are compliant, so, they don't want to be messing you around with cliched reasons as to why their margins might vary.

If they quote you a rate then you can either push them to do better on it, or you accept it. Either way you will find them more motivated to price accurately.

What to do then if you're yet to become a formal client but are considering a move? Take half an hour to submit applications for more than one firm - take a look at ours if you want an idea of what you'll have to submit. Ready the documentation so that you can swiftly complete the process, then, compare. For most firms you won't need to submit anything additional to the registration document itself. Requests for additional information tend to be made of those applicants resident outside the UK, but, in any case the request will be for something you will likely easily have to hand like a copy of a passport.

Within a day or so you can accurately find out both whether your current mechanism is value for money or the most convenient plus you're in a position to immediately transfer your business elsewhere.

If you were buying a house and went on a viewing, you make an offer, it is accepted, but you then reveal to the agent you are yet to sell your own property...the agent will advise you to come back to them when you have the money ready, but, they certainly won't guarantee you that the offer you've made will still stand. Like with so many things, with FX you need to be able to proceed before you'll be taken seriously (broadly speaking) - and only unless you've been referred to Prime Cap by one of our trusted partners.

2. What is their 'minimum' transfer amount?

On the face of it this might matter little to a business or individual who knows they will consistently be doing a certain volume, however, an FX company's approach to this question tells you a huge amount about how they might treat your business 'longer term' as well as informing you of their marketing bias and what sort of margins you can expect over time.

The most obvious thing to take account of is that, if they do have a minimum transfer amount, what are you going to do if you need to transmit less than that sum?

Treating the smallest of transfers in the same way as the largest is a good indication that this firm will behave in one of two ways.

a) they will consistently cleave to the margin they know induced you to use them in the first place because deviating from that could well lose them your business on larger sums which would offset any prior loss. Call it the 'loss leader' principle. It is less work for the broker, particularly those with an online capability, if they know they can depend on you using them at the price they've set.

b) a low minimum transfer amount might be indicative of a teaser rate, particularly if, in the first instance, you indicate this is all you need to transact. Your dealer has to quickly assess whether she or he feels there is merit in taking you through all the relevant steps to transact and, because giving a consistent margin is important to a credible dealer, smaller sums as one-offs don't cover their own costs.

3. Who do they bank with?

When asking who a company banks with, we may mean two things. Who does the broker holder their client accounts with, and whom do they use for their own day-to-day management accounting. These could be the same bank or different institutions.

Some brokers do not hold their own client accounts, but, don't be fooled...this is not a bad thing at all!. Like Prime Cap, they may use the segregated accounts of a larger, older, regulated institution.

Fundamentally, whether client accounts are held with a bank or a non-bank matters not when it comes to the security of a client's money.

Having segregated accounts with a bank implies limitations on both the currencies a firm can deal with and the client's with whom they can transact. Although holding one's own currency accounts it is indicative of high currency turnover, it also suggests a bigger work force, which in itself means wider margins and higher overheads; likewise there may be more stakeholders pushing for the business to operate leaner which can have an effect on service and skill level.

In roughly 2013 one of the larger providers of banking services to the the 'non-bank'

deliverable currency sector chose to 'de-risk' their portfolio. They couldn't vouch necessarily for the commitment of their FX commercial clients to correct and thorough compliance verification in line with their regulators' expectations. More generally they felt they were putting themselves at risk because of their exposure to errant money remitters on their books.

Of course, this had broad implications for the deliverable FX sector as a whole. It meant that many brokers who did good, compliant and consistent work, lost their ability to receive client funds for settlement of deals.

Now, systems were already in place for brokers and intermediaries to buy their currency from other currency companies who had retained their client accounts with the banking institution in question and to settle, ironically, into current accounts held by that other broker with precisely the same bank; but, said bank issued notice to a huge chunk of the market.

Basically, the bank was only really interested in dealing with the largest of its clients; not only did their de-risking exercise lose them significant FX business, but, it also means that the cost of remaining as a client of theirs went up to make up for the shortfall.

It is worth noting that this is in fact the narrative of a number of FX firms when it comes to their 'retail' clients (you and I are retail clients). Pursuant to point #2 - those companies with a low wholesale FX turnover for their bank take up just as much time as larger clients, but offer less of a reward/revenue, and yet a portfolio made up of 1000 small clients is far more stable than one reliant on the activities of 5 big clients - especially when everyone else is the currency world is aware of whom those big 5 bank with and are eagerly trying to court them.

Anyway, the fact that only the largest of FX companies now held segregated client accounts

meant that they assumed the role, more or less, that the bank once occupied. There was and is nothing to stop these big FX businesses from selling the wholesale currency they buy from their bankers to other smaller FX businesses. Essentially, the smaller FX business was thereby granted use of their bigger cousin's client accounts and the bigger cousin's sales focus moved towards increasing the number of wholesale businesses they dealt with and less to do with private retail clients. This is, in fact, very much the story of Prime Cap. The vacuum left by the bigger players moving more into the wholesale space is what gives Prime Cap scope to grow. We have one less set of competitors - in our view.

We rely on the diligence, compliance and competition of our wholesale partners in much the same way as we used to when we held our own client settlement accounts. We have simply offloaded that responsibility to a bigger player in the market and we pay them for use of their facilities. Our customers get cutting edge financial tools, we get a sizeable partner who maintains a whiter than white compliance profile and we simply provide the brokerage expertise as we have always done.

Back when we started, when we were merely a twinkle in our founder's eye, it was unusual for a broker not to hold their own client accounts. Now though it is common place and no less secure or useful for the client...in fact, we would argue that we have stripped out clunky personnel heavy aspects of our business and refined our margins accordingly.

4. Do they have online capabilities?

Online systems, if your broker has them, are indicative of a company that has taken outside investment (in our experience).

Proprietary platforms are tremendously expensive.

Yes, consumers are attracted to all things online, but, operationally they are cheap to run and mean fewer human moving parts needed, so the outlay ends up paying for itself when it comes to overheads.

If a firm works purely online then an account manager (rather than a 'dealer') can handle the inquiries and activities of many hundreds of clients. The process becomes far more about trouble shooting issues with the platform rather than guiding and advising on strategy or product. This then results in the same competition vacuum that used to characterise the execution of transactions with your bank.

In fact, the company that presents itself solely online through a platform is leveraging your distrust of your bank to persuade you to use them, even though they are providing you with almost exactly the same product/tools. It is brilliant really.

Whilst we, Prime Cap, do provide online tools both in a turn-key sense and read-only, we've not lost or done away with the all important dealer.

In fact, their involvement in our clients' dealing is intrinsic to our value proposition.

You get an expert, well versed in your matter, and you get systems you recognise, but, at no extra cost.

If a firm does not have online capabilities you might be concerned because it shows both an arrogance and an unwillingness to modernise.

We dont say that to be mean...but, analogue is less efficient, more costly and less accountable. If your dentist were using 20 year old procedures you would question the quality of the care you are receiving. Why are financial services of this nature any different?

Prime Cap has been the distinct beneficiary of the shift by large private equity backed foreign exchange firms moving the bulk of their dealing online. Those who refer to us want to know who is going to be taking their client through the transaction. Fine, there can be someone sat behind the scenes making sure you don't put the wrong figure in the wrong

box, what we mean is a real expert who knows about clearing times, how banks treat domestic cut-off times, what days of the week tend to see a more buoyant rate...

If you got the same level of convenience, but had someone you know (in the context of what we're discussing) taking you through things, would you feel more confident?

Our partners certainly do. We can tell them, to the minute, when money for a purchase will clear with them - when you're buying a house in another country sometimes that can be the only difference one needs to offer and yet with us it is not.

5. How were you introduced to them?

Just because your friend uses a company does not mean they or you will get a better deal. It may help you feel more confident about using a set of services you were hitherto unfamiliar with, and, it will undoubtedly save you money for which you will obviously be grateful, but, someone recommending you to a firm like Prime Cap might not be doing so because your interests are best served, but rather because their pocket is being lined.

Is that an issue? Not necessarily. It is a shame that some professionals will only refer work to companies who compensate them for so doing. However, the fact they recommend their client to a specialist in the fist place is a good thing so can we begrudge them receiving something for that act of selflessness?

At the end of the day, whether or not the source which introduced you to your broker is receiving a kick back is an issue only if it affects how competitive a rate you might receive.

Using knowledge of a referral agreement between your broker and your chum, or your accountant or your financial planner, to achieve a better rate for you is done thusly...

Ask.

Ask the referrer what they receive for introducing you. You can then work out what sum

they might get and, from that, what sort of margin you might likely get on your rate.

If the margin and what you are quoted don't match up (unfavorably so) then this tells you something very important about the broker. Most referral agreements tend to rely on some sort of profit share. "I will give you a percentage of my revenue for your referral if they trade with me. If they dont then neither of us is out of pocket." The trouble is there is nothing governing what the broker might offer you, the client. The broker is unlikely to want to give away hard won profit...so he may widen his margin to offset what he has to pay the introducer; thus leaving you worse off. You are in effect paying for that introducer to refer you.

The question is then: 'should someone who you might already be paying for other services really be affecting the level of competition you get from a broker?"

Prime Cap would love to say we do not pay commission to anyone for the referrals we receive. To do so would be to peddle an untruth. In some cases and where it is the difference between receiving a referral and not, we do pay, however, working with as many solicitors as we do means that in the majority of cases we couldn't pay a commission even if we wanted to. It would not be allowed. This means we sleep easy, those who refer to us can rest assured their client is getting a fair deal and the client doesn't have to pay what is tantamount to a tax for the referral.

In instances where we do pay a commission we only engage in such a practice provided we are offered exclusivity by the referring party. If they referrer all of their international currency work through us then we can ensure a watertight process and can afford to actually tighten our margin rather than widen it. Volume of clients and currency is the key to a mutually beneficial relationship in our sector. Many currency firms offer referral fees to anyone they meet. This devalues the work we do and means customers become hostages to their advisers.

If you came across your currency company through some sort of advertising (whether that be in print or in person at something like The France Show) please remember that a number of players and stakeholders will have had a hand in crafting the message that got you to engage them.

This eats into how competitive they can afford to be for you on the rate. Multiple stakeholders means numerous hungry mouths taking a chunk out of the saving that could be in your pocket.

Furthermore, companies that are owned by Venture Capital or Private Equity firms are very very keen on improving their own margins in order to give themselves the multiples of return they'd based their acquisition on - all of this serves as a competition killer for the customer...you.

6. Do they offer a 'set spread'?

When you look online at an exchange rate you are in fact viewing a tiny snap shot of the value of one currency vs another at the precise moment of your search.

You'll see a clear example of this at the top of our Data Centre. That singular figure is not a rate of exchange, but an average of what someone is prepared to pay for a currency and what someone else is prepared to sell the currency at. The rate moves so quickly because those offers and asks electronically match up with each other and cause the rate to hop up and down depending on what was offered or asked.

Refresh the page and the rate will have changed. The snap shot you are looking at does not account for the market up a company or a bank will apply to the currency you want when you come to buy it from them. Online is basically showing you the cost of the raw unit without the involvement of any third party seller of the unit.

Companies who talk about offering a 'set spread' mean that regardless of the amount of currency you transact through them, they pledge to apply the same mark up within their rate across the board.

This is truly tempting to time poor accounts operatives who simply want to know they are getting something consistent and don't have to shop around.

The trouble is that the set spread is a relative concept, tied inextricably to the rate the FX broker gets from their bank or market maker.

Hence, it is actually meaningless to offer a set spread and 9 times out of ten is simply a rhetorical device - a fall back position the broker uses to protect themselves and their rate from scrutiny.

Companies who offer set spreads are likely to be challenger firms; ones who are not of such scale that they need to achieve a minimum revenue on a transaction yet. Many firms instruct their dealers that they must make £20 or £50 per transaction. If they do not then it comes off the dealers figures as a loss. This is because the house wants to cover expenses and then some; the dealer himself doesn't to see any commission until he has posted 'x' amount of revenue in any given month. So you see, the incentive is firmly to transact at as wide a margin as possible so that he gets to that target quicker and the starts accumulating his commission percentage.

You may have already spotted the issue with this?

If a company says their dealer must achieve £50 revenue per transaction then, on a transaction of £2000, the dealer has no choice but to apply a margin in excess of 2%. This is basically the same level of competition (or lack thereof) as one's bank. So, again, we see larger more structured firms going the way of their banker rivals and providing an ever shrinking margin of improvement to the customer. Interestingly, the way firms of that size account for this lack of competition is by either suggesting that their staff and expertise makes up for it (which we've actually seen isn't the case given the calibre of staff they hire) or they repackage a low margin deal with a high margin price tag for the end user...for instance these 'Regular transfer plans' that some firms peddle.

At Prime Cap we adopt a variety of approaches. Set spreads tend to be offered more to corporate clients who are totally margin focused. Part of our commitment to developing a strategy with you involves identifying what it takes, in terms of what spread we apply, to undercut your current provider. We want to beat them on insight and on price so sometimes we may be very direct and ask you what you currently receive. We would sooner win your good favour than squeeze fractions of a percent more out of the transaction on the revenue side of things. The mere possibility that you might refer us on is worth enough to incentivise us to cut our margin; furthermore, our online capabilities mean that we can handle far more than analogue brokers whose portfolio is really only optimal at about 200 clients (per dealer). The more clients we get the more competitive we can afford to be.

7. How many departments are there within their company?

Understanding where you came from, in terms of your broker's sales cycle and sourcing, can tell you a lot about what you can expect from them.

If the firm you're considering has a lot of referral relationships from multiple sectors as well as heavy online marketing like Google Ad Words and the cash to publicise themselves at trade shows like A Place In The Sun then you need to appreciate just how many people are involved in making that happen.

There are only a limited number of people in the UK transmitting money international on the sort of scale that can support and sustain the sort of business development activities some firms engage in.

Margins are shrinking because they are one of the easiest areas for small firms to challenge bigs ones over.

Yes, some big firms are diversifying and you can expect certain big financial institutions - mainly those with credit based activities - to start acquiring challengers in the retail space, but, the bottom line is that a company with a lot of departments is supporting and financing them out of your margin. Literally nothing else. They would like to discredit smaller competitors of theirs, but, chasing a lean operation and returns for investors can very often mean economising on quality of staff and level of care.

Why would you want to 'test' your broker? Well, for one thing you may get a further saving out of it, but, the principle of expecting more from our suppliers and providers is something that drives improvements in the market. In a sector where the notion of value differs wildly from firm to firm, only by asking questions and holding firms to account can you, the customer, an me, the broker, hope to reach an equilibrium where need is met in a cost effective way and with best practice and value for money at the heart of the engagement.

PRIME CAP are always available to discuss our practices and principles. You're very welcome to pick up the telephone (02031728193) or visit www.primecappayments.com to find out more.

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