The great foreign exchange rip-off is coming to an end
A few years ago, when Gulliver was a wide-eyed reporter on his first business trip, he stopped by a bureau de change in London’s Heathrow Airport to buy foreign currency. His excitement quickly turned nervous when the reporter moved 12% from the transaction, justifying the theft by tapping on a display screen of the ruins of exchange rates. Today, Gulliver knows better than to buy foreign currency at an airport. But many are not: in 2016 Heathrow received £50m ($68m) by leasing retail space to bureaux de change. New technology and startups could soon change that.
Savvier passengers have, until now, purchased their foreign currency in advance from bureaux de change outside the airport. Higher competition and lower costs mean that these companies trade closer to the interbank exchange rate – the price at which two currencies are exchanged by financial institutions. But all intermediaries require a mark up, so they still add a margin of 2-5% to their “no commission” quotes.
A new breed of “challenge banks” wants to end that racket. Revolut, a financial technology (or “fintech”) startup that operates exclusively through its mobile app, is leading the charge. Like a traditional bank, it offers customers a UK current account and prepaid debit card. Unlike one, it offers live interbank exchange rates for overseas transactions that users can lock into the app. Other fintech competitors are also squeezing the margins that traditional companies build and, in some cases, forcing them to change. In 2016, high street bank Santander admitted it was charging six times more for international money transfers than digital competitor TransferWise. Amid great pressure, last month it launched a new platform, One Pay FX, which uses blockchain technology and claims to be even cheaper than its rivals.
Revolut and TransferWise are just two fish in a pond of start-ups aiming to disrupt the established order of Britain’s retail banking sector. Other newcomers, such as Monzo and Starling Bank, focus on domestic transactions rather than foreign currencies. All appeal to younger generations through their digital apps, which are cheaper to run than brick-and-mortar banks and bureaux de change.
Of course, finance is not the only industry involved in digital disruption. Hotels and taxi companies used to take advantage of their position just like banks do, until the emergence of Airbnb, a website for overnight stays in other people’s homes, and Uber, riding app, they to more competition. The banks and bureaux de change can take comfort from the fact that old habits die hard. Some travelers still need to buy physical currency before traveling abroad, which usually attracts higher handling costs and commission margins than digital currency. Not all places have cash machines and some, like rural Germany, don’t even accept card payments. On an emotional level, many people believe it is more risky to upload one’s wealth to a mobile app than to lock it in a brick and mortar bank – regardless of the legal guarantees. But the same can be said about stepping into unmarked cars, or staying in strangers’ homes. And that hasn’t stopped Uber and Airbnb from being successful. The Heathrow bureau of change should like their 12% while they can.