At one time, many people thought that fintechs would have the international retail money transfer business to themselves and that the large banks could really not compete with them. Well it is true that the large banks do very well out of retail customer FOREX transactions. But they were wrong in thinking big banks would not retaliate against the very successful fintechs such as Revolut and Wise. HSBC has now taken the plunge and decided to compete against them. Let's look at how they have gone about this endeavour and then look beyond this application into the use of this sort of technology in other areas of financial services, like global lending and borrowing.
The first thing to note is that, sensibly, HSBC has decided not to make their forex offer under the HSBC name (supposedly a stuffy old bank) but under the name Zing - a separate company but owned 100% by HSBC. And there is no need to be an HSBC customer to download the app.
However, Zing is not a bank but an e-money institution which is different from a bank as it does not have the support of the UK deposit insurance fund. Thus, deposits are at risk if Zing collapses and HSBC does not rescue it. However, it is authorised by the Financial Conduct Authority (FCA) just as banks are but only has to follow the simpler regulations in force for e-money institutions.
The first thing to note is that, sensibly, HSBC has decided not to make their forex offer under the HSBC name (supposedly a stuffy old bank) but under the name Zing - a separate company but owned 100% by HSBC. And there is no need to be an HSBC customer to download the app.
However, Zing is not a bank but an e-money institution which is different from a bank as it does not have the support of the UK deposit insurance fund. Thus, deposits are at risk if Zing collapses and HSBC does not rescue it. However, it is authorised by the Financial Conduct Authority (FCA) just as banks are but only has to follow the simpler regulations in force for e-money institutions.
The fees charged may or may not be higher or lower than Revolut or Wise. It's hard to know at this point. They say that "We use a third party exchange rate. We present any other potential fees separately so you can easily see what's going on." However, it is hard to know what this means. Below is what they say on their website:
But how does the conversion rate compare with the wholesale market mid-rate and the bid and offer rates? Why are the 'Conversion fee' and the 'Transfer fee' not charged separately rather than being bundled into the exchange rate?
Whatever is the case, it's certainly a much better offer than from HSBC. Today, according to Kristo Käärmann the Wise CEO on a tweet on X, HSBC charges their own customers 3.7% in hidden FX markups for "free" Euro transfers. That is probably close to what all the large banks charge on small retail transactions.
What we see when we exchange money is a rate and perhaps a fee or a large sign saying 'no transaction fee' or 'free' foreign exchange. But because we don't have easy access to the wholesale rates at which banks can trade we don't know what the 'spread' between the buying price and selling price in the wholesale market is, In fact, for the major currencies its very small indeed. And, of course the traders at any forex company or bank are in the market all the time and often make money on their transactions.
But even then, banks and fintechs don't actually have to transact in the market all the time. What they actually do in the major currencies is set off their customers' buy transactions against their customers' sell transactions so that in their internal system, there is actually no cost at all to most exchange transactions. It's only if there is an imbalance between buys and sells that they then have to enter the market. We have no idea from what they tell us what is meant by 'a third party exchange rate'. It could be a Wise or Revolut rate or the rate from a small bank which has a large spread between bid and offer.
What we must always remember is that often the alternative, when we have forgotten to buy our euros or dollars in advance for a foreign trip is to use a forex dealer at an airport to obtain foreign currency notes. If we do, the spreads between their buying and selling rates are always very high indeed. That is how they make very satisfactory returns in their business and do it all 'commission free'!
Of course today, we don't normally buy foreign currency notes when we are going abroad. We simply use our UK payment card. If we are using Zing we can easily convert some of our sterling into the foreign currency as they are offering FOREX currency exchange wallets in which to store up to 10 currencies. Money can be put into these wallets by using sterling from any bank account and converting it into the required currency using Zing. That money can then be used with a payment card to pay at retailers in the country of the currency.
At the point of spending, there is no need for a further forex transaction by the foreign bank or the customer's home bank. But the foreign currency in the wallet may, at the point of making a purchase in a store, be worth more or less than at the time it was purchased through Zing. This is quite different from how a UK sterling payment card works abroad since the exchange rate is determined at the time of the actual transaction. However, if the market exchange rates have not changed, or the foreign currency has appreciated, then we will undoubtedly be much better off using Zing than our sterling bank card where we have to either accept the rate of exchange of the bank used by the foreign retailer or a cashpoint machine or, as we are often offered the choice, of using our own main bank in the UK to undertake the exchange.
HSBC is probably trying to take the place of Citibank which was for the long the bank of choice for international banking as it had many international branches. Today it's as likely to be JP Morgan Chase, Bank of America or Standard Chartered. It's certainly a good business objective to go after this market as there are many people who are either corporate expatriates or living abroad or travelling frequently who would value the Zing service and if they liked it might then also use HSBC for business transactions.
Its seems likely to us that HSBC will, initially at least, ensure that its offering is competitive not only with Wise and Revolut but also measured against HSBC. It's also backed by one of the world's largest banks. It seems unlikely that HSBC would let Zing collapse and indeed it's very unlikely that it would.
So Zing may provide consumers with greater choice in conventional currency exchange but this technology is evolving at a pace in financial services so where could digital currency exchange also be deployed? One of the obvious extensions to this would be the use of digital currency exchange within global lending and borrowing. With this type of technology, lenders could lend in one currency, providing funds to a borrower in a second currency and perhaps even withdrawing repayments in a third - all managed within lending system using third party currency exchange rates. Of course, beyond that there is the possibility of lending and borrowing with "currency" exchange rates that includes crypto as well as fiat.
Will it be the deep pockets of the banks or the speed and flexibility of the FinTechs that win that race? Certainly there is much for the regulators to be thinking about with the use of this technology, globally.