Banking and payment solutions for regulated FX Brokers are usually straightforward. I say "usually" as even FX brokers with recognised licenses can have a hard time finding suitable options in today's era of strict bank policies. Entry-level offshore FX brokers from St. Vincent, Marshall Islands and etc. are quite limited in how they can process incoming and outgoing payments, deposits and withdrawals.
This article will cover the most common payment solutions available for offshore FX Brokers as well as shed some light on what can be expected with each.
The abbreviations that will be used:
- B2C- Business to Client
- C2B- Client to Business
- B2B - Business to Business (often used for transfers to/from Liquidity provider or vendor)
- PSP - Payment Service Provider
- IBAN- International Bank Account Number
- KYC- Know Your Customer
- PA (Payment Aggregator) - a service that assembles several payment systems into a single solution
- EMI - Electronic Money Institution
- MDR - Merchant Discount Rate (fee to assist transaction)
- SEPA - Single Euro Payments Area
Realistically, Offshore FX brokers will not be able to secure a corporate bank account at a Tier1 or Tier 2 bank and they should therefore look into Tier 3 banks in less economically-developed countries.These banks are traditionally lacking many online banking features, do not have great client support, and take their time to reply. Offshore FX brokers are often required to pass "in person" interviews and rejections are very common.
Cost: If you have a decent FX network, there may be no fee to open the bank account. If you don't, then expect to pay $2-$3K to an agent with no guaranteed results.
Island banks often charge monthly maintenance fees to have an account open (from $3,000 and up), as well as restricting the number of daily transactions.
Offshore FX brokers mostly use banks to hold operational capital and to facilitate B2B wires and larger B2C transactions.
Fees: Often a fixed fee and percentage (whatever is greater), can be as low as 1% MDR or as high as 11%. MDR is higher on crypto deposits/withdrawals.
European EMIs (manly UK and Lithuania)
The EMI is growing as a bank alternative. An EMI is not a bank and has certain limitations (for example, they can't take lending risk).
Typically, an EMI is well-vetted, has proper KYC in place and is more reliable when compared to a PSP. Normally an EMI will assign a client IBAN (use its own SWIFT number). Therefore more companies may be willing to accept an EMI for financial transactions.
Prepaid Debit cards issued by EMIs are among the most common ways to process the small transactions of FX Brokers.
Fees: Fees are Volume, Sector and Origin based, but assume the average 150-250bps (~1%) on money inflows, and an average fixed EUR 50 per transfer. Within SEPA, fixed transfer fees can be around EUR 12.50.
PSP (or E-Wallet)
PSP examples include Webmoney, Qiwi, PayPal, Skrill, Neteller, Yandex and others. An FX Offshore Broker needs to open a wallet in the selected payment system and place it on the website and also in the Trader's Room.
Fees: Can be dramatically different between currencies. Make sure to get a detailed breakdown. One PSP was charging my client MDR 15% on all USD wires.
Average MDR is fixed fee (EUR50-125) or 2% B2B, 4.5% C2B (whichever is greater).
Crypto Deposits (can be made to PSPs, EMIs, less common to Banks)
Over the past few years the amount of funds transferred in crypto has grown dramatically. There are quite a few automated solutions from OrangePay or Cryptonator, as examples.
Fees: Generally higher compared to regular wires, literally no fees if transferred to offshore FX brokers wallets.
VISA/MASTERCARD - This option requires the FX broker to have a company with Bank Account in Europe and have an agency contract with an offshore entity.
The European Company acts as a payment agent to receive funds. This type of structure has recently become difficult to set up due to the fact that less and less banks are willing to work with FX deposits.
Payment Aggregators: (Winpay, OrangePAy, Interkassa) may save a lot of time dealing with different PSPs and are often used by start up brokerages.
Checklist of the questions you should be prepared to answer:
- Proof of URL domain of the company
- What is the average number of payments per month to the account?
- From which jurisdictions you expect to receive incoming funds?
- What will be the source of these incoming funds?
- Which are the most important business partners of your company?
What are the biggest struggles :
- Credibility of the financial institution
It may sound like an oxymoron, but Offshore FX Brokers are more likely to use unlicensed financial institutions that have a higher risk of failure. Desperation combined with a limited choice of providers are leading to less strict due diligence and as a result - a loss of money. You are already running a high-risk business and it is super important NOT to settle with an unlicensed payment solution.
I put the cost below credibility for a reason. Low fees are attractive but they also act as a red flag. $5k in monthly savings may cost you an entire company deposit. Are you willing to risk it?
The cost of payment solutions is a sensitive topic that some FX Brokers tend to ignore. I often look at SYOB business plans and rarely see proper expenses recorded for the deposit/withdrawals. Start-up offshore FX Brokers should consider a 5-10% expense for all incoming and outgoing wires.
- Volume of transactions
Some financial institutions may experience technical issues or a system "overload". FX Brokers have to provide a few alternative solutions to avoid clients complaints.
- Payment providers/financial institution high attrition rate
Legal mergers, acquisitions, license suspensions and so on are more common among the types of financial institutions that offshore FX Brokers will be using. The only solution is (1) diversification and (2) continual monitoring of news about your partners.
Common Sense Tips:
- FX Brokers should not keep all funds in one place (Bank, PSP, EMI). The average FX Broker has over 6 working solutions and is always in search of new
- Go local. FX Brokers must look at their client-based preferred ways of depositing/withdrawing
- NEVER keep the firm’s operational funds together with client funds. Separate. That will help to maintain proper accounting for future audits
There are thousands of solutions out there (there are 500 EMIs in Europe alone, 1400 Money Service Operators in HK) , don't waste your time talking to everyone. Talk to the experts who can provide you with a unique, proven working solution!
If you are an FX broker from an entry level jurisdiction, and are struggling with finding the right payment solutions - please contact us. For a small fee our team of international FX Industry experts will guide you through the challenging process of setting up a bulletproof payment solution system for your FX brokerage:
Author: Anya Aratovskaya, VP of Institutional Sales
Anya has over 14 years of financial services industry experience. She has developed a broad knowledge in all aspects of Foreign Exchange business environment, latest technological capabilities, risk management and global regulatory practices. She has helped numerous FX companies, banks and asset managers elevate their businesses to a completely new level by successfully implementing progressive technologies and liquidity solutions into their models. She provides a valuable leadership and direction to company’s staff and outside counsel. Anya holds a Master of Science degree in Financial Services from Northeastern University.