“Man feel like a champ right now / smiling to the bank right now” sings Jamaican singer Govana in his famous song ‘Champ’.
Unfortunately many brokers may feel like champs but sadly they’re often not smiling to the bank. That’s because banks are often aggressively reluctant to do business with them.
Probably the biggest pinch point for brokers is finding banking and payments solutions.
When Octa had problems in India, we caught a glimpse of how extreme some of these solutions are. They were having local PSPs mimic e-commerce transactions for deposits, then funnelled cash into investment vehicles to get the cash out of the country to avoid breaking capital controls rules.
This stuff still happens. For example, if you are making a deposit with Olymptrade in Malaysia, you have a peculiarly large number of local deposit options. But when you go through the actual deposit process, it’s almost certain that your bank believes you are making an e-commerce transaction with a local merchant. What you do when a client wants to make a withdrawal is less obvious but somehow I imagine that’s not a problem Olymptrade clients often have to worry about.
One way that brokers are getting around some of these potential problems is to actually own some kind of banking or payments regulatory license.
There is something of an industry split here. For example XTB, Trading 212, and eToro offer payment products in Europe and the UK. XTB and Trading 212 don’t have payments licenses and use third-parties, but eToro actually operates with licensing as an electronic money institute in the UK and Malta.
However, this is less about dealing with backend payment problems and more about being a ‘super app’, improving retention, marketing, and capturing more client wallet share.
What I am describing is more about keeping your operations running by being able to take deposits and manage funds. We have seen some more indicative examples of this over the last couple of months. Earlier this year we reported on Deriv applying for a banking license in St Vincent and the Grenadines. Last week we also reported on JustMarkets acquiring a crypto license in the Seychelles, which could be used for payments and treasury purposes.
Other firms have done similar things. The most developed in this regard is FxPro. They operate a fully-licensed bank in the Bahamas, which is owned by a US entity, and also have a full electronic money institute license in the UK.
Another popular option is a Canadian Money Services Business (MSB) license. Broker DB Investing holds one of these and Joao Monteiro, the founder of broker 4XC, has also launched an MSB called XlentPay. That company also provides services to other brokers. TradeInformer is also aware of one major player in the prop trading and brokerage space that is seeking to acquire an MSB license.
MSBs are popular because they are more cost-effective than EMIs in Europe. They have fast set up time, no real capital requirements, and also have crypto permissions attached to them.
Crypto licenses are also a popular option, partly for payments and also because they could be used to funnel back global USDT payments and move them into the ‘fiat’ system. It’s obviously hard to prove this but you would imagine almost any company with crypto-style permissions could use them in this way.
All of these solutions arguably offer some cost saving abilities – you don’t have to sign up to a third-party EMI, for example, if you can operate that infrastructure yourself. There can also be added benefits, like issuing payments cards to your end clients.
There are other more interesting benefits as well. Let’s say you have an EMI license. Now you can go to a local PSP in Thailand.
“Hello my friend,” you’ll say. “We are an EMI with many, many clients, including this clothes business, a shop that sells craft tea pots, and [you mutter this part fast and quietly] a forex broker regulated in the Seychelles. Wouldn’t it be much easier to onboard with me and then you get all of these people as clients, rather than having to reach them individually?”
“Did you say something about the Seychelles?” the Thai PSP will say.
“Tea pots, my friend.” you say. “Craft tea pots.”
Then they onboard your EMI and (in theory) you have faster access to local payments. In practice, I don’t know if any broker has actually managed to achieve this much-vaunted status.
Another more tangible benefit is the reduction in the risk that you get blocked. Having had my own bank account frozen twice, I can tell you the pain and fear such an experience incurs. It’s like being stuck in a nightmarish aquarium. Your money is floating by, but you can’t bang through the glass to get it.
Part of the reason brokers’ accounts get frozen is they are often pooled together by payment providers. So you can have huge numbers of high risk providers all using what is effectively one account. Then the regulator comes and starts looking through what’s going on. You are cooked.
Although it might be the case that more brokers do stuff like this, I doubt it will become a big trend for the simple reason that it’s a massive amount of time and effort to do it. Even if your payment and banking services aren’t great, you probably CBA to do it yourself.
To top that off, you can end up being blocked by the bank or corresponding bank that sits above you then. You went through all that trouble to not get blocked by the EMI. Then your EMI got blocked by a bank. Fuuu……
