The payment war has finally begun

With the electronic, online nature of today’s retail financial product range, the need to ensure that a good quality merchant services channel can be achieved is paramount.

Ask any professional who has spent any length of time in the FX and CFD business what their opinion is on payments solutions providers (PSPs) that provide service to the online trading business, and the majority will likely demonstrate a very low opinion indeed.

Not without justifiable cause, PSPs that are specific to the FX industry’s small to medium sized retail brokerage sector have a terrible reputation for being money launderers, pyramid marketers and leather jacketed, swaggering former binary options salesmen.

This has created a difficult position in that merchant services providers Visa and Mastercard have now accrued a very dim view of retail brokerage businesses because of the third party payment firms that have muddied the waters, and banks will not readily accept deposit accounts for such transactions, leading to tremendous risk for brokers who have been rash enough to move their banking to third tier banks in Eastern Europe and the CIS region who will accept any customer but have lax security leaving brokerages open to hacking.

Today, the dilemma has created such a commercial obstacle that a series of financial technology companies have set up a non-profit organization to act on behalf of third parties on issues relating to the Second Payment Service Directive (PSD2) which affects our industry.

The European Third-Party Provider Association (ETPPA) formalises the existing Future of European Fintech coalition into an official non-profit TPP trade association. Founding members include Bankin’, Eurobits, PPRO, Sofort and Trustly.

The FoEF was originally created to lobby against the first draft of the PSD2 regulatory technical standards back in February 2017.

Fintech firms felt that provisions on customer authentication and communication were designed to benefit the banks and make life harder for third parties.

The new ETPPA will continue to push the interests of bank-independent third party providers as they jockey with banks over gaining access to customer accounts.

Ralf Ohlhausen, executive advisor, PPRO, says: “We are delighted to strengthen our position with the launch of the ETPPA, and we encourage all bank-independent TPPs and fintechs with a significant interest in the PSD2 arena to join us, to bolster our efforts in supporting TPP interests vis-à-vis banks, as well as national and European authorities.

“A crucial aspect of PSD2 is the abolition of the monopoly that banks have over accessing their customers’ account data.

This will allow consumers to unlock their data and obtain a wide range of value-added services. It will strengthen the position of financial start-ups, as well as promote the development and use of innovative online and mobile payments and account information services.”

This is a very good step, and may well lead toward the formalization of some type of framework for the payments sector, which despite having some degree of regulation in the UK via the FCA’s specialist division that focuses on payment providers (which is quite vague and loose), has very little regulation and many providers have got away with using private individuals to launder money through third party accounts in order to deposit funds to unregulated brokerages and circumvent the merchant services regulations, constituting money laundering.

FinanceFeeds is aware of several Cyprus based brokers that pay affiliates in Thailand, Cambodia and Vietnam to accept client deposits to their own private accounts before forwarding the funds to the broker, which is not traceable and is tantamount to money laundering.

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.

Meanwhile, this week, some of the larger Tier 1 financial institutions have begun to move toward offering payment solutions for our industry which is a very welcome step.

It is FinanceFeeds opinion that should a firm which is in our industry that has a banking license, such as Swissquote, IG Bank or Dukascopy actually offer such a service, it would not only be a very good additional service to brokerages, but in some cases, a vital one.