Retail FX offers lucrative returns

Research from London-based client strategy firm ClientKnowledge found that the growing client base can generate annual profits of between $1 billion and $2 billion a year for retail service providers.

The potential business opportunity has led banks including Deutsche Bank and ABN Amro to enter the market with retail trading platforms. Meanwhile, others such as UBS are also thought to be at varying stages of development.

Justyn Trenner, chief executive of ClientKnowledge in London said banks have a clear opportunity to participate in the growing retail foreign exchange market from their wholesale divisions as opposed to retail or wealth management divisions. He said: "If you do have the flow management capacity, the upside revenue is going to be more reasonably achieved within that area."

"When you add up the spreads that tend to be achieved with the fees you can reasonably charge, and the balances that you hold, one should probably think of profits being nearer $1.5 billion to $2 billion of profits," said Trenner.

Indeed, benefits could go beyond the realm of the FX business, with cross-product sales opportunities for global markets divisions. "There are some wealth management clients who are concurrently trading FX on retail sites, but the bank's objective is to access new clients to the wholesale division who can then be integrated into other products over time and who are sophisticated enough to require wholesale pricing delivery," said Trenner.

ABN Amro's Marketindex which was launched in June last year, for example, enables trading in equity indexes, currencies, commodities and bonds. Similarly it is thought that UBS was also looking to launch a multi-asset class retail trading platform that would initially offer margin trading in FX.

The research said that for banks to compete directly with retail aggregators, they have to integrate a new pricing and risk model that stands directly between their wholesale and retail/private banking divisions. These are areas where banks have traditionally been able to charge wider spreads.

"Recreating the model internally within a bank is an option, but the perception is that adding a bank's brand name to an existing process would be the quickest and most effective way to take advantage of the opportunity," the research found.

Indeed, ABN Amro confirmed last year that it had launched its platform in conjunction with online FX trading company Oanda.

Trenner said when looking to partner with an existing retail platform, a bank needs to decide whether it is to earn money for the loan of its brand name, or whether to see the flow. "If you want to see the flow you have to decide whether or not you have the tools and capability in-house to maximise the revenues from that flow that a lot of the existing retail firms have. Be sure if you internalise that flow that you can make as much or more money than you would have made by simply taking a cut of what your white label partner could make."

However, retail FX is not for everyone. Trenner said: "It is by no means suitable for every bank, but could be a key accelerator to additional revenue and client base for banks that have successful e-FX platforms and believe they can leverage the opportunity of retail FX."

The research is based on interviews with six retail aggregators and more than 12 banks, and was carried out from November to the end of January this year.