New Breed of Forex Firms Using Net

Foreign exchange, an old banking service, has a new home on the Internet.

A handful of specialty firms are firing up Internet-based services to cost-effectively meet the expanding currency needs of small and midsize companies.

The upstarts, including Sonnet Financial Inc., Money Garden Financial Group, and Currency Management Corp., are exploiting an opportunity overlooked by big banks, which are more interested in serving major corporate customers.

"There is a market for niche players," said Octavio Marenzi, an analyst at Meridien Research, a Newton, Mass.-based consulting firm. But foreign exchange as a whole remains "dominated by big banks," he added.

The Internet's low cost and easy access is spurring the growth of specialty firms, some of which began by offering their services over the telephone or private networks.

Nine-year-old Currency Management of Hertfordshire in the United Kingdom said its business has quadrupled since October 1996, when it started conducting business over the Internet.

It now handles $3 billion of foreign exchange transactions a month.

The international expansion of small businesses is also creating demand. Dan Carmel, senior vice president of Sonnet, points to a Business Week article that said one-fourth of small and midsize businesses in the United States are involved in some type of cross-border commerce.

"If you are not in a position to deliver competitive services, you almost are pushing your corporations to look for a better solution," he said.

The bane of small businesses in the $300 trillion foreign exchange market has been their low volumes and small transaction sizes. Transactions of about $1 million can cost 15 basis points, while $10,000 transactions can cost as much as 300 basis points.

San Mateo, Calif.-based Sonnet eases the economic burden by pooling many small transactions into one larger one. It promises banks and corporations savings of thousands of dollars per transaction.

"Banks that are not money-centers and corporations have all banded together on-line to achieve economies of scale," said Mr. Carmel.

Several banks use Sonnet's Internet-based and personal-computer-based foreign exchange services, including two California-based institutions, Bank of Los Altos and Cupertino National Bank and Trust.

Six-year-old Sonnet also provides direct foreign exchange services to hundreds of corporations, including Continental Airlines, International Business Machines Corp., and Wang Global.

Organizations are attracted to the company's fixed fee structure. "My incentive is to make sure you get the best rate," Mr. Carmel said. There is "no incentive to extract a pound of flesh from you in the rate."

Once a forex deal is entered by a customer, Sonnet executes a Fed Wire transfer to debit the account. It then sends the transaction to one of its two transfer agent banks for execution.

Currency Management, which has about 1,000 customers including small businesses, fund managers, and individual traders, attracts business by offering spreads of five pips or less. (A pip is the smallest unit of difference between two currencies.) Depending on the size of trades, customers are required to maintain a minimum account balance.

Though margins are tight, profits come with scale and the low costs of direct channels such as the telephone and the Internet. Internet trades take less than two seconds to execute, compared with 45 seconds on the telephone, said Roger Hynes, director of marketing.

Meridien Research's Mr. Marenzi said the higher-flying specialty firms should maintain a low profile.

Though they are "after a class of customers that someone like Citibank wouldn't be trying to court," that could rapidly change, he said.

"If Citi gets the idea that these services are interesting, you can be pretty sure that it will start providing them and blow someone like Sonnet out of the water.

"Sonnet is in a situation where it would like to be successful - but not too successful to attract the attention of the larger banks," he said.

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