New US project for fintechs and brokers challenges traditional way of banking

Proving FinanceFeeds research absolutely right, at last a bank has been established in America purely to meet the client funding and transaction needs of FX brokerages and fintech firms

At last, someone has taken a step that has needed to be taken for many years, and of which FinanceFeeds has been a fore-running advocate.

It has taken a very long time, however this week, a new direction has arrived within the corporate sector, which more than echoes the outcome of a FinanceFeeds investigation more than three years ago.

Mushegh Tovmasyan

This is a particularly interesting point, as it is a subject that FinanceFeeds has been probing in great detail since 2016, largely due to the inflexibility of the somewhat hypocritical Tier 1 banks which view the OTC derivatives sector as a core business activity which makes them a tremendous profit from just one operational headquarters in London’s Canary Wharf as opposed to the obsolete retail banking sector with its massively inefficient High Street branches and low-revenue loans and mortgages, yet refuse to extend not only counterparty credit, but also custodial accounts for retail brokers to place their client money.

Three years ago, which is an epoch in the development timeline of today’s FX and electronic trading industry, it became patently apparent that a specialist, dedicated service was needed, that should be developed by the FX brokerage industry, for the FX brokerage industry, yet despite our massive drive toward encouraging those with the wherewithal and background to provide such a service, laurels were sat on and hand wringing prevailed, until now.

Do brokers who have worked hard to innovate the financial sector really want to receive the short shrift from banks that profit from their trading?

This week, 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 has established Zenus Bank, which has been 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 this morning to Mr Tovmasyan this morning 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 this week in London, FinanceFeeds met with Saxo Bank senior executives who raised the importance of this point, especially with regard to how to find a solution.

Meeting with Lucian Lauerman, Head of API Business at Saxo Bank in Canary Wharf, London just after that, a solution to this very important issue was discussed.

Mr. Lauerman stated “I took note of your recent research with regard to the difficulties experienced by brokerages in opening bank accounts for operating capital and holding client funds.”

FinanceFeeds then suggested that there could be a method by which specialist firms could provide these services, thus avoiding the pitfalls that many brokers are now exposed to by being pushed toward third tier banks.

“Sometimes we meet clients that have well run businesses and are doing good job for their clients, but they are having difficulties getting bank accounts” explained Mr. Lauerman.

“Recognising this issue, several years ago we invested in Saxo Payments, a business that provides a real alternative. FX payments businesses need a bank account in order to send and receive payments and they need a service that is fast and low cost. The Saxo Payments Banking Circle provides exactly that solution. It allows companies who are serving merchants in the digital space to open physical and/or virtual IBAN accounts in 25 currencies, in their name and/or their client’s name” he continued.

The accounts can be domiciled in the UK, EU and Denmark, with Asia and the US becoming available in 2017. Companies can send and receive cross border and local payments at a low cost and within seconds rather than days, if the other company involved in the transaction is also a Banking Circle member. And payments are sent in the underlying client’s name, in order to increase transparency and reduce rejections.

“Saxo Payments was established to provide a simpler, faster and more cost effective way for businesses to make and receive payments. The Banking Circle cuts out the middle man – and the fees charged” said Mr. Lauerman.

At this point, Peter Plester, Head of FX Prime Brokerage at Saxo Bank explained “This is the point at which it is important to consider the quality of a prime brokerage when looking to establish liquidity relationships. Where do they do their banking? Do they have a banking license and therefore the capital adequacy ratios are enough to secure good banking relationships, and can they offer services that are far superior than other non banks?.”

It is of great interest that senior industry executives on the institutional prime brokerage side of the business have the ability for retail brokerages to maintain good banking relationships for the purposes of lodging operating capital and the safeguarding of client money as priorities and are thinking comprehensively about this.

What did Saxo Bank do in order to further this direction? You have guessed it. Nothing. The Montgolfier brothers could have put this amount of hot air to good use.

Mr Tovmasyan has stated that he is spearheading this direction. “I was lucky to be part of the disruptive movement in the beginning of the 21st century that saw trading migrate from phone calls and paperwork to online platforms” he said.

“As a veteran of the online trading industry, I spearheaded key trading platform developments and operated broker/dealers in the foreign exchange/derivative markets that witnessed firsthand how regulation around the world developed to adapt to these new ways of transacting. Throughout my journey, I worked with brilliant people and gathered inspiration from business dealings in six continents, servicing a wide spectrum of clients. This experience made it clear how FinTech innovation under geopolitical fragmentation has actually magnified the problem of social financial exclusion and widened the opportunity gap between the Western world and a huge demographic of people” said Mr Tovmasyan.

“The concept of Zenus Bank, therefore, is to be one of the first banks in United States to service global clientele. Equipped with the latest in omnichannel digital banking technology, we expect to enable individuals and corporates to safely access, send, receive and store their hard-earned money. We are a self-funded, successful team of experienced financial service professionals who have come up with a targeted business plan, acquired the necessary regulatory approvals and begun building the infrastructure of a very scalable bank” he said.

“Simply put, we are doing what we do well: financial services. By design and necessity, we are heavily dependent upon technology, but our strength is managing the integration of proven processes and technologies, both recent and mature, while fulfilling the needs of our stakeholders. We design our processes and choose our tools with the goal of delivering the best customer experience, while making sure to comply with all rules and regulations” he concluded.

Mr Tovmasyan has appointed a CEO to the firm who has been on the executive board at Citi, Santander, ScotiaBank and Mastercard as well as an advisor to Visa.

Whilst FinanceFeeds has absolutely no commercial relationship with Zenus Bank or Mr Tovmasyan, this is a development which had been foreseen by us and therefore is vitally important to take note of.

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