Businesses see spot FX volumes fall 42% in four years

Total spot foreign exchange volumes traded by businesses across Australia, Canada, Singapore, the UK and the US have fallen by around 42% since 2012, a study by East & Partners shows.

The research firm compiled the report, which based its conclusions on responses from more than 14,000 businesses globally, in July and August. It found the contributions from large and small businesses to the FX spot market share have declined over the past four years, with Australian firms experiencing a 75% fall, while Canada and the UK saw a decline of about 38%.

"As the total business spot FX market shrinks, competition between providers intensifies... [the] report highlights that traditional domestic and international banks dominate across the globe, with non-bank providers unable to replicate their retail success," East & Partners said.

Across all business segments globally, the market share of non-bank providers accounts for about 11%. In the UK, the total is 15%, but the number drops to one in 20 when looking at the US, Hong Kong and China, according to the report. In contrast, "Australia proves to be a regional outlier where around one in four businesses primarily use a non-bank provider to execute their spot FX transactions".

Compared to their global peers, Australian importers and exporters are more willing to look beyond their bank for their spot FX transaction needs
Martin Smith, East & Partners Australia

"Compared to their global peers, Australian importers and exporters are more willing to look beyond their bank for their spot FX transaction needs. Although major domestic banks maintain their dominant market position, boutique providers are luring in business customers with the promise of lower execution costs and superior digital platforms," said Martin Smith, head of markets analysis at East & Partners Australia.

"The opportunity is there for both bank and non-bank providers to generate greater engagement with more sophisticated products, such as FX options and forwards. The race is on," he added.

Amit Alok, head of East & Partners Asia, said: "The Asian market is proving to be a tough market for non-bank providers. The report shows that Asian businesses, particularly in China and Singapore, use branch networks in addition to online platforms and phone to execute their spot FX transactions at a much higher rate than other regions. This gap in service availability may provide a clear explanation as to why niche providers have not been able to increase their market share."

The research also highlights how micro businesses and small- to medium -sized businesses use credit cards in lieu of FX management strategies to cover the cost of foreign payables. An average of 37% of firms cited the use of personal credit cards as a spot FX payment tool. Chinese corporates stood out with a share of 71%.

Greater hedging

"Although UK businesses have reduced their spot FX volumes by more than a third over the last four years, they remain highly exposed to currency fluctuations and increasingly in the volatile post-Brexit vote markets. The vast majority – around three-quarters – of small businesses exclusively use spot FX solutions for their foreign payments. However, there has been slow, but consistent growth in the use of hedging FX products by small business in the UK in the last few years, as these businesses seek to reduce their exposure to this FX risk," said Simon Kleine, head of client services at East & Partners Europe.

"Considering recent record drops in the pound, the question now is how quickly will the majority of small businesses in the UK move away from spot FX to hedging FX products to reduce their FX risk?" he asked.

East & Partners interviewed 14,113 individuals responsible for their firms' business banking FX relationships.