How Fintech Is Leveling The Playing Field for FX And Cross Border Payments

The rise of the forex market is a direct response to the increased connectivity of global business. This connectedness has led to forex becoming the most liquid market in the world,

According to the Bank Of International Settlements, foreign exchange trading increased to an average of $5.3 trillion a day in 2014, or $220 billion per hour. The vast majority of that liquidity comes from institutional-size investors, including governments, banks, and large businesses.

But thanks to the internet, it’s easier than ever for businesses of any size to participate in global trade. However, these smaller business have historically operated at a disadvantage to the institutional players.

How The Global Forex Market Works

Just like trading on any exchange, an order on the forex market involves a bid/ask spread. Those spreads come from the banks and brokers who facilitate the transaction, and help them make billions in profits in the process.

For example, if you wanted to by the EUR/USD (Euro as it relates to the U.S. Dollar) specifically at 1.2, that’d be a little difficult. The spread offered by the bank or broker will most likely force you to pay a little more, maybe 1.6.

That may not seem like a lot, but if you’re a business trading millions of dollars on the forex market, that adds up. These spreads are the hidden cost of forex trading, even for brokers who advertise themselves as “commission free.” The spread itself essentially operates as a de facto commission.

Here’s the rub: big institutions, such as banks, are allowed to place midpoint orders. Midpoint orders average out the bid and the ask from the spread, allowing the institutions to essentially always get the best available price for their trade.

Leveling The Playing Field

Until recently, midpoint orders were unavailable to anybody outside of institutions—such as retail traders or smaller businesses.

That’s changed however thanks to fintech, particularly the rise of peer-to-peer lending platforms. For example Midpoint Holdings Ltd MPT uses a P2P matching system that allows anybody on its platform to use midpoint orders on the forex market, so every buyer and seller is essentially receiving the same interbank midmarket rate regardless of transaction size.

“It is a cost structure arbitrage. We do not have legacy technology issues and overheads that a bank would have,” said Midpoint CEO David Wong. “80 percent of our competition is the banks.”

Many of these firms make up for the lack of spread by charging a flat fee per transaction. This has helped attract everybody from bankers, traders, and hedge funds.

“While there is no minimum transaction size, our transparency generally attracts sophisticated clients,” Wong added. “We serve numerous family offices as well as private equity and hedge funds.”