Looking to compete in one of money-center banks' most lucrative correspondent businesses, a Silicon Valley start-up has rolled out a personal computer-based foreign exchange service for small and midsize companies.
The corporate cash management service, called FXchange, from San Mateo, Calif.-based Sonnet Financial Inc., has been up and running for about a year. It is aimed at firms with modest foreign exchange needs - those that typically have transactions valued between $10,000 and $500,000. The trades are used mainly in support of international business activities.
Though foreign exchange traders turn over about $1 trillion a day worldwide, only about one-fifth of that actually supports cross-border payments, with the rest being market speculation, according to Dan Carmel, vice president of marketing at Sonnet Financial.
As a result of this high-stakes speculative slant, smaller companies seeking to trade currencies are often at a decided disadvantage, paying as much as 3% more than the interbank rate, or the exchange value banks pay each other for currency.
"It's a lot like buying a car," Mr. Carmel said. "Like automobile dealers, foreign exchange banks will to tell you what they are willing to sell (a certain currency) at, but not what their actual cost is." Firms usually have had to maintain multiple bank relationships and shop around to get the best possible price, he added.
FXchange allows corporate treasurers to enter a foreign exchange transaction via PC-based software that transmits the data to Sonnet Financial. At the end of the day, Sonnet Financial aggregates all the transactions of a particular currency, then goes to market with a single trade for each currency.
These aggregate orders are large enough so Sonnet can execute trades often within 5 basis points of the interbank rate, Mr. Carmel said. Clients are charged a flat $150 fee for each FXchange trade.
With the more favorable exchange rate and a flat fee, FXchange users can save $600 to $1,100 on a $50,000 transaction, Sonnet officials claim.
Sonnet has attracted more than 50 users for FXchange in the last year, but has recently begun to court midsize and community banks that have offered foreign exchange services mainly through correspondent relationships.
The first bank to co-market FXchange to its own clients was Cupertino National Bank & Trust, a $250 million-asset institution also headquartered in northern California's high-tech belt.
Daniel Michener, senior vice president and managing director of venture lending at Cupertino National, said the bank focuses on "lending to early- stage high-technology companies" that do 40% to 60% of their business overseas.
The bank had previously offered foreign exchange services through a correspondent bank, but "service was pretty poor and we weren't getting good pricing," Mr. Michener said.
He added that 10 of the bank's corporate clients are now using FXchange. "Given that our client base is very computer literate and likes to be able to execute things quickly, it made a lot of sense to us."