Direct Foreign Exchange Inc. is trying to bring the lucrative, high-margin business of foreign exchange and currency services on-line to an underserved niche of small, regional and local community banks in the U.S. with the help of the Bank of Ireland's wire transfer and currency-exchange infrastructure.
Launched and incorporated in the U.S. this spring, Direct FX is in the midst of implementing a "white label" FX option on the Web site of its first stateside customer using Bank of Ireland's FX network, which is linked to the U.S. in part through B of I's Orlando-based subsidiary, the Foreign Currency Exchange Corp. The service could give smaller banks a new entry into FX, and serve as a wake up call for the larger institutions that have largely controlled the FX space in the U.S. for years. The rollout also comes as one of Bank of Ireland's major rivals licks its wounds from a major FX scandal.
The hosting of the FX service is offered free to banks under a revenue- and customer-sharing agreement with the 221-year old, Dublin-based bank, according to Larry Wentz, president and leader of Direct FX's stateside efforts. The service targets smaller banks' retail and business customers by branding the service in the banks' own names. Wentz declined to name the first customer, but described it as a medium-sized, recently merged regional bank on a growth-by-acquisition strategy.
He says Direct FX aims to provide a larger piece of fee-based foreign exchange revenue to smaller banks by implementing direct on-line mark-up functionality from discount wholesale FX rates and a share in FX fees provided by Bank of Ireland for wire transfer, foreign currency exchange, bank and traveler's checks, bank-note purchases and sales services.
The Irish bank has decided to offer a portion of its FX pie to gain access to the regional bank's lucrative U.S.-based customers and boost its own stateside foothold. North American offices are in Chicago; Greenwich, CT; Santa Monica, CA; and Toronto and Montreal. Direct FX gets paid for its services solely by the Bank of Ireland, which Wentz calls the firm's "sponsor."
"We want access to your customers and in exchange we'll put you in the foreign-exchange business in a very risk-free, low-cost, safe and reputable manner," Wentz says.
The idea is to further seal smaller banks' relationships with their customers by adding the FX option for individuals or smaller businesses, such as manufactures or antiques dealers, which often prefer to go through their local bank for most of their financial needs.
According to Wentz, the few local and regional banks that currently offer on-line FX services have done so mostly without the benefits of making much money on the option, because foreign exchange remains largely the high-margin domain of major correspondent banks like JPMorgan Chase, Citibank and Deutsche Bank. The mega-banks leverage their global infrastructures to offer FX services as customer-retention ploys in correspondent packages to smaller banks, and pocket most of the markups.
Wentz promotes Direct FX as a way for banks to "safely and securely" enter the FX market through the Internet while cutting out the middleman. While agreeing it's "definitely an underserved market," Sang Lee, an analyst at Celent Communications says the real question is whether there's "truly a demand" for such a service.
That likely depends on whether the Bank of Ireland can deliver on Wentz's promise of offering lower or wholesale FX rates to smaller banks, which could force other banks to take notice and demand the same from their correspondents. Such a price war would certainly shake up the competitive landscape of what is still a diffuse and, at times, rather murky marketplace.
Negative impacts from a continued lack of price transparency in the sector were made apparent again last month when Allied Irish Bank-Ireland's biggest bank-admitted it had overcharged customers $17 million over the last eight years on FX deals. This follows an FBI sting earlier this year alleged to have uncovered a boiler-room fraud which rung up multi-million profits in bad FX trades done through the help of rogue employees at various major U.S. banks in a scheme said to have gone on for over 20 years.
By far the world's largest market with about $1.5 trillion traded daily, the FX market remains largely unregulated, though liquidity centers like the Chicago Mercantile Exchange and central banks try to risk-manage the giant sector. Rates fluctuate rapidly with myriad global and political machinations and can leave unwitting customers, according to Wentz, at a "real disadvantage." He views Direct FX's efforts as "the next step in" in opening up the market to fairer pricing.
Yet Direct FX is not alone in the space: Wentz's former employer Citibank offers its own white-label service, and regional banks like Commerce Bank & Trust, Bank of Oklahoma and Fifth Third have gotten into the game through their correspondents or via Swift connections to global counterparties. Travel-oriented rivals include EZforex and Cash by Courier.
Still, Wentz has seen previous efforts bear fruit: He left a 15-year career at Citibank in 1994 after taking measure of the transformative powers of the Internet, formed his own company, and developed "FX Fox," an electronic currency-trading system that was eventually bought by investors of what is now Currenex, a global FX e-trading platform.
