Starting a financial-focused business in 2021 is challenging enough as the full impact of the Covid-19 pandemic has yet to be fully understood. This is especially true in the money exchange space as the industry is dominated by multi-billion pound giants like Wise (formerly TransferWise) who compete against multi-hundred-billion pound banks.
Anyone thinking now is an opportune time to enter the currency brokerages space may not fully understand how crowded the space is and just how much power the industry titans have.
The currency brokerage industry: many big and small players
One of the first steps in evaluating a business idea is understanding the competitive environment. Starting a business knowing there are few companies in the space offering a competing service makes the entrepreneurship journey just a little bit easier.
But looking at the global foreign exchange space shows this is far from the case. There are at least two dozen FX exchange providers in London alone. London is the epicenter of the global foreign exchange industry so it is natural for a large number of companies to be based out of the United Kingdom.
There are other major global money exchange hubs, including New York City, Singapore, Tokyo, among others. In total, there are certainly more than 25 large money exchange providers in the world that can easily cater to a global client base.
Sounds like an uphill battle for new entrepreneurs? It is even worse. On top of the several dozen large and global money exchange providers, there are many smaller competitors. Add to that the even larger number of even smaller competitors that have already built a presence in the market.
These smaller competitors take advantage of platforms like Currencycloud. Currencycloud is a provider of financial infrastructure and solutions to any business that wants to exchange currencies. In other words, Currencycloud acts as a white-label provider of a financial ecosystem that facilitates FX transactions.
Good luck standing out against dozens upon dozens of rivals.
How big is big? Wise wants competitors to know
Wise is set to become a public company on the London Stock Exchange and could be worth £9bn to £10.5bn. As part of the IPO process, Wise released some key details about its business and outlook. This could be seen as a cautionary tale against new companies who are tempted to compete against an industry giant.
Wise says it “developed a modern global payments infrastructure to replace the outdated correspondent banking system.” This is a true statement as the company is a pioneer in offering customers a transaction cost that is very close to the mid-market rate.
In total, Wise serves 10m customers that range from individual people that need to send money across borders to businesses of all shapes and sizes. The company has been profitable since 2017 and management re-invests profit back into its business.
Aside from that, Wise has more than 500 engineers and launches more than 90 production deployments per day, or around 3,000 a month. Think you can keep up with that? What about Wise’s focus on artificial intelligence that it describes as its “bread and butter”.
Entrepreneurs are known for having ambitious plans and executives with notable industry experience aren’t afraid to take on a company like Wise. But what if we told you that as big as Wise appears to be, it is in fact a very small player in the global FX transfer business.
Banks are the market share winners
By Wise’s own admission, banks still account for a 97.5 per cent market share when it comes to international payments and transfers. Banks are notorious for being slow, outdated, expensive and offering a generally unpleasant experience, yet it still dominates the industry.
Wise further states its vision to disrupt banks will take “years, probably decades”.
And throughout these decades, banks have the ability to react quickly and adapt by simply lowering their fees. They aren’t the ones fighting to gain market share, rather they are the ones fighting to keep it. And keeping customers is certainly a lot easier and cheaper than finding new ones.
Are banks paying attention? Absolutely. Jamie Dimon, CEO of JPMorgan, said in early 2021 that traditional banks should be “scared s—less” about fintech rivals. But the company is certainly up for the challenge. The CEO said it boasts “plenty of resources” to catch up and overtake fintech rivals. He added:
“I expect to see very, very tough, brutal competition in the next 10 years. I expect to win, so help me God.”
Competition where no one thought to look
While evaluating the competitive landscape within the FX exchange business, many are surprised to find out that some of the major players include stock brokers. For example, Interactive Brokers brokerage allows customers to exchange one currency for another as an investment.
Clients can also close their foreign exchange investments and withdraw cash in the currency of choice. This process might be a bit more complex for individual investors as withdrawing cash in a foreign currency requires a bank account that can accept the foreign currency.
For example, a British investor who exchanges their pounds for yen via their Interactive Brokers brokerage account will need a second account denominated in yen to close the transaction.
Conclusion: think twice about your currency brokerage venture
Having established the currency brokerage space is very competitive where even an industry leader like Wise is a very small player, it is worthwhile to think twice about starting your own company. This isn’t to say that a new entrepreneur can’t make a lot of money, rather it is to say that there are likely better opportunities to pursue elsewhere.