Keep away from the payments upstarts: FXOpen’s Denis Peganov concurs that stability is the only way

Payment provision in FX is a very hot topic at the moment. FinanceFeeds speaks to Denis Peganov at FXOpen who concurs with our view that sticking to proper, tried and tested, regulated methods are the only way forward

The msiguided attempt this week to sway electronic trading and ecommerce companies into believing that payments will become digitalized has indeed created a degree of conversation among FX industry executives.

Since FinanceFeeds highlighted the matter, and wrote it off as absolute hot air, notice has been taken and that can only be a good thing.

FinanceFeeds perspective is that the sensationalist media reports hint that the payments industry – a rather dubious sub-sector of the financial services business that has been relied on tremendously by retail electronic trading brokerages ever since the mainstream merchant services companies began making life difficult for brokers to accept deposits from retail clients – is likely to be ‘digitalized’ are contrary to the reality.

By digitalization, the users of jargon and buzzwords mean that payments companies are looking to move toward cryptocurrency as a base unit for transactions. We stated that this is absolutely not feasible.

As a result of our perspective, the important subject of payment provision to FX brokerages came up once again, and because it is a vital linchpin with regard to how brokers send and receive funds to and from clients via channels that have become very restricted over a series of years.

The important matter here is for brokers not to get sucked into potentially dangerous schemes on the premise that they have become weary from limited choices in the past, and perhaps may wrongly be led into believing that nonsense such as crypto-based payment systems would ever be an acceptable method of handling client funds.

Today FinanceFeeds spoke to Denis Peganov, Business Development Director of FXOpen, a company that for two decades has managed and handled substantial client business across several continents and navigated specific payment related rules and procedures in order to operate in different jurisdictions with different banking requirements.

Mr Peganov explained “The situation is tough and it is getting tougher every day. There is tremendous pressure on brokers from all sides – payment processors, regulators and clients.”

“The best you can do to keep your payment channels stable include strictly followinh AML and KYC policies to make sure you comply with the requirements of the payment processor, making sure your business practices are fair and your reputation is good and clients do not complain to regulators and always have back-up payment solutions ready to use in case you lose one of the channels” – Denis Peganov, Business Development Director, FXOpen

The hyperbole last week went along the lines of that taking into account the growing trend of blockchain integration into a broad spectrum of industries, it is becoming obvious that the financial industry will be leading the adoption charge. The advantages offered by blockchain as a financial off-ramp and a processing infrastructure that surpasses the capabilities of traditional systems are making the technology a prime candidate for investments by major payment processors. It will take the giants some time to embrace the power of blockchain in full, but it is obvious that the time is nigh.

This is completely unfeasible, and Mr Peganov’s perspective absolutely backs up our opinion.

Over recent times, some specialist services which are particular to the FX industry have been established with a view to remedying this longstanding issue, one of which was established in North America in May 2019 by FX industry executive and entrepreneur Mushegh Tovmasyan, formerly the COO of Alpari Group’s UK division as well as having established institutional services provider Divisa Capital and its retail FX division Equiti Group before exiting earlier this year after almost 11 years, has begun to establish his solution to a very important FX industry problem.

Having acquired a banking license in the United States, Mr Tovmasyan established Zenus Bank, which was established to address this exact requirement, in that it provides multi currency customer fund accounts for regulated financial institutions (brokers, fintech, PSPs) and correspondent services for qualified banks.

FinanceFeeds spoke at the time to Mr Tovmasyan in New York City. He explained “I’m sure you realize how many problems this is going to solve for the world. It offers first world banking in a Tier 1 jurisdiction, and this is especially important for the brokers for example struggling to accept client deposits. They can refer clients to Zenus Bank and from there there are no restrictions. If broker has an account with us, there will be 24/7 real time settlement for margin calls and other activities that are specific to brokerages that are not handled by mainstream banks.”

Indeed so. Banks are always lecturing their commercial clients about abiding by the rules and how they must ensure transparency, yet research recently by FinanceFeeds has clearly shown that many mainstream banks that are in regions populous with companies either providing services to the FX industry or FX brokerages themselves are anything but transparent.

A few extreme cases that have been brought to light by our research that highlight the risks that face brokerages that are forced to use 3rd tier banks have recently emerged because of the reluctance by mainstream firms to maintain their business, some of which involve the theft of capital from accounts held by brokerages, due to lack of security of accounts, as many lower-level banks in overseas regions do not have the same level of security as those in regions in which FX firms (and companies in every industry sector) are used to.

In some cases, the level of theft of capital has been into the hundreds of thousands of dollars, which is alarming and most certainly a point worthy of consideration for brokers considering placing their business with banks that are not structured according to Basel III liquidity ratio levels or under strict regulations in terms of data security and identity verification compliance procedures.

We know of one brokerage which had its accounts closed for absolutely no reason whatsoever in Cyprus, which was then forced to use a third tier bank, and has had approximately $350,000 stolen from its operating capital account by fraudsters because third tier banks have weak security and their systems are easily hacked.

Another example, which is equally toxic, manifested itself in a brokerage in Cyprus having had its commercial bank account frozen by a Cypriot bank, with no explanation, resulting in the inability to deposit or withdraw funds, almost causing the downfall of his business.

Just imagine, a brokerage with a frozen account cannot pay client withdrawals, salaries, rent for premises, suppliers – and then would be subjected to the media finger-pointing from clients which would assume that the firm was intentionally not paying, when in fact it was the bank freezing the firm’s account without explanation. The CEO of that firm explained to FinanceFeeds “I will never, ever forgive the Bank of Cyprus for what they did to me. After months of wrangling with them, I managed to free my capital but they did not provide any reason for having frozen the accounts, nor were they co-operative or remorseful. I will never do business with them ever again.”

FinanceFeeds can categorically back this up. Many reports that have come from very reputable sources, including accountancy firms in Cyprus and professional services companies that work on behalf of FX brokerages which have power of attorney over several accounts with Bank of Cyprus have explained that the bank routinely freezes accounts, will not allow withdrawal or deposit, and makes firms submit and resubmit ID documents over and over, every few months, citing compliance purposes, when really it is little more than low-level ineptitude and lack of regard for their bread and butter business.

In Britain, things are not much better. HSBC and Barclays, both ironically two of the world’s largest FX interbank dealers, will run for the hills if any mention of FX industry is mentioned when applying for a bank account. Handelsbanken, which is Swedish but has many operations in Britain and only works with businesses on a referral basis, will not work with FX firms or businesses in certain jurisdictions, claiming that these are high risk entities.

Whilst this is problematic insofar as it forces firms to use third tier banks, it is not as toxic as the behavior of the Bank of Cyprus, which accepts custom, then freezes accounts, meaning that companies cannot access their own capital, sometimes for months at a time, with the expense of having to keep either paying a lawyer or accountant to attempt to convince them to free it, or actually flying to Cyprus (many CEOs of Cyprus FX firms do not live in Cyprus) to be confronted by hand wringing automatons who cannot make any progress despite making special trips to the bank’s International Business Unit (IBU) in Nicosia.

Recently, FinanceFeeds visited Handelsbanken, whose staff were extremely disparaging of the FX business, and actually spoke to me personally with derision when they were asked if they would accept client custodial accounts.

So, the status quo is either derision (which is disgusting), or exposing client funds to danger via third tier banks in unregulated jurisdictions as per the unfortunate aforementioned Cyprus based broker who had his account hacked and funds stolen.

What perhaps makes Mr Tovmasyan’s initiative very poignant is that he is the first FX industry professional who has actually taken the steps toward providing a service which is required, and which some FX brokers with banking licenses have had the ability to do yet have rocked on their heels.

Our research some years ago involved a case in which a retail FX brokerage had several hundred thousand dollars stolen by fraudsters which is a point worthy of consideration for brokers considering placing their business with banks that are not structured according to Basel III liquidity ratio levels or under strict regulations in terms of data security and identity verification compliance procedures.

This research resonated with some of the large firms that provide liquidity to brokerages and have vast and solid capital bases, and indeed got a few backs up.

Concurrent with Mr Peganov’s point of view, FinanceFeeds maintains that the best course of action is to ignore any such flannel from the crypto chancers, and either seek out good quality bank based solutions among traditional banks if the criteria can be met, and with dedicated banks in first tier jurisdictions should your brokerage’s payment requirements be a little more on the boutique side.

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