Pepperstone founder Owen Kerr was right all along

Owen Kerr made the important connection between FX brokers and the public listing aspirations of deliverable firms. Those who disagreed scoffed. Nobody is laughing now, as brokers struggle to keep client funding accounts when they could be going for banking licenses

Sydney Australia

Owen Kerr, the erudite young founder of Pepperstone, one of the world’s largest and most profitable retail FX companies, was indeed correct.

Those who scoffed, and indeed there were some, can now repent.

During the early years of last decade, Mr Kerr, at the time one of the youngest senior executives in the FX industry, found himself in a position of success, his company having carved out more than a decent amount of business from its original headquarters in Melbourne, a dynamic which formed the basis for the company to expand across the world, whilst it remains one of the top three FX firms in terms of size among its home grown Australian peers.

Mr Kerr embarked on a few media campaigns attempting to demonstrate the vast growth of deliverable FX firms and how they were attracting huge IPO valuations in their quests to become publicly listed.

Oh how they scoffed. “He’s attempting to create a noise and associate anything and everything with IPOs just to make investors focus on buying retail firms” said the dissenters.

Well, it’s not funny anymore.

Back in 2013, Australian deliverable FX firm OzForex raised many an eyebrow among financial sector industry leaders by raising $416 million via its IPO, representing the largest IPO in Australia throughout 2013 and causing the company’s share price to accelerate by 30% on the Australian Securities Exchange before mid-October last year. This was one of the deals pointed out by Mr Kerr just a year before it took place.

At that time, he made it public knowledge that he and his business partner Joe Davenport were investigating the viability of the ASX as a possible venue to list their global online ­currency-trading broker business, in a move that could net the two Melbourne-based entrepreneurs, both 29 years old at the time, about $600 million between them.

As we all know, Pepperstone remains privately held to this day, however Mr Kerr’s observations and aspirations were correct, especially with regard to deliverable FX firms and their attractiveness to investors.

Today, some seven years later, the momentum continues, whereas the retail FX IPO buzz fizzled out in just one year, spurred by Plus500’s listing on London’s AIM market many years ago. Others jumped on the bandwagon, some listed, some were acquired and a year of mergers and acquisitions took place, whilst some firms put out outlandishly over-exaggerated press releases about their unattainable IPO aspirations, however it was a fad.

On Owen Kerr’s home territory, things have not only blossomed for the deliverable FX firms that have become publicly listed. The next dimension is now on the cards, that being obtaining banking licenses in Australia, a notoriously difficult thing to achieve.

British deliverable FX firm Transferwise has completed this task, however, and has been awarded a restricted banking license in Australia in order to gain direct access to Australia’s real-time payment system by the country’s Prudential Regulatory Authority.

Under the licence, TransferWise will be able to provide purchased payment facilities, as a “limited authorised deposit-taking institution”.

FX brokers the length and breadth of the world will no doubt consider this a smart move, especially considering how difficult it is to gain and maintain client fund custodian accounts and merchant services agreements for deposit taking and withdrawal processing. That has been a major bugbear for FX brokers for many years, in that most often they have to use specialist payment processors, some of which are less than reputable, in order to conduct this as banks shy away from it.

In worse cases, brokers have been forced to use third tier banks with slack security systems in unregulated jurisdictions and have been subjected to hacks which have removed large sums of client money.

Becoming a bank removes this issue. Banks are masters of their own custodian services and any broker with a banking license is welcome anywhere at any Tier 1 institution.

The UK-based currency transfer company will join PayPal as the second non-bank to gain direct access to Australia’s real-time payments network. TransferWise says it now intends to apply for a settlement account with the Reserve Bank of Australia.

The move will reduce TransferWise’s cost of doing business in Australia, freeing up funds otherwise paid to intermediaries to connect to the network.

TransferWise was the first non-bank to get access to the UK’s faster payments system, including a settlement account with the Bank of England.

The company is also looking to be one of the first non-banks to connects to the Singapore Fast network, after the country’s central bank today confirmed that it would open up direct access to the nation’s real-time payment plumbing to non-bank financial institutions (NFIs).

So, next time any FX broker looks at the activities of a deliverable FX firm, Mr Kerr’s words can be remembered and heed can be taken.

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