Since the EU referendum on 23rd June 2016, endless scenarios have been debated on the implications of our divorce from the EU and what that means for the finances of individuals, both presently and in the future. As 29th March 2019 approaches (the scheduled departure date), the prospect of a ‘no-deal’ Brexit and the impact such a scenario would have on the pockets of British Citizens with foreign monetary interests, is coming ever more sharply into focus.
For UK Commercial Foreign Exchange Brokers, particularity those whose profit-lines are heavily reliant on Private Foreign Exchange transactions, the 2-year hammering of sterling has been a constant worry. An exit from the EU without a deal, and what is currently a grave concern could become a catastrophic reality.
For individuals wanting to buy overseas, this has meant a pausing in many plans. A 2nd home on the continent is roughly 20% more expensive than it was before the Referendum; a result (pun intended) of GBP/EUR dropping from 1.36 at the beginning of 2016, down to the 1.10s seen this week. By that comparable, the €250K Mijas apartment you had your eye would previously have been costing just shy of £184K. Now? £227,272!
Coupled with inflation consistently outpacing wage growth in the UK (meaning people are worse-off in the pocket), the number of individuals still with the budget to invest in property has understandably shrunk.
Brits interested in foreign luxury goods or events are also being priced out. Clients looking to buy that vintage Mustang from the States, or stage that dream wedding on Lake Como, are being stretched in the pocket and their number decreasing.
For Brits already living abroad, with pensions or salaries being moved over regularly, they have also suffered that 20% drop in the amount received into their bank accounts. Mortgages being financed from the UK are also costing more, with the consequences of a ‘no-deal’ Brexit likely only increasing the woes. Perhaps of far greater concern is speculation that, should a solution not be found, Brits living in Europe could lose access to their UK banking and pension services!
On the other side of the coin, those selling abroad and moving back to the UK have seen a healthy increase in their asset value.
The adventurers working abroad and repatriating their salary have equally seen an increase in their bottom line. That said, although good news for now, UK citizens with jobs abroad have the possibility that, in the event of the no deal, their qualifications may no longer be recognised, meaning they would no longer be able to stay and work. Whether taking advantage of rates or concerned for the future security of their employment – it would be understandable if the number of people looking to cash in and move back has increased.
For the direction of flow in PFX, it means the disparity between the number of sellers and buyers of sterling; transfers out of the UK and reparations back (previously weighted heavily in the former’s favour) has narrowed.
But a balancing in trade direction will not likely lead to a balancing of the books. For UK brokers, sterling sellers will always need to remain the key revenue-generators. Whilst the changing currency landscape has enabled more creative and further afield business thinking – a Floridian looking to buy in Paris or Swede looking in Spain perhaps – returns are dubious. Expanding into foreign territories is expensive, the desire of prospective clients to deal with a UK-based company questionable, and the potential profit unknown.
No hope for the old guard? Not quite. The last several years have seen the rather inevitable rise of the Fin Tech; and currency transfers for individuals has been an obvious and understandably fertile ground for expansion. With slick online processes for a younger generation who, they gamble, value price and speed on a snazzy app over everything else, online platforms and prepaid cards have sought and received significant backing. And as with the dot com boomers of the 1990s, these new kids on the block have been magnets for huge investment; with a model of ‘aggressive growth and increased market share’ in place of immediate profit.
A quick look at the most well-known of these players’ annual accounts supports the vision that a new business ‘valued’ in the hundreds of millions can do so by showing investors the growth in client numbers, if not the positive numbers on a current balance sheet.
For the longer-established companies, more than 1 has moved certain operations out of London in the last 24 months. Whatever the motivation, there’s no doubt this helps alleviate some overhead from the capital’s rents and workforce, thus managing outgoings more effectively in preparation for the horizons of the future. An understandable move when you’re a business in an ever-busier marketplace, up against a loss-making Manchester City-type who just aren’t playing by the same rules. But in a ‘no deal’ scenario I do believe the longer-established brokers have advantages in flexibility, reputation and service not in the models of others.
Already, for those online newbies prioritising client acquisition alone, there is the question mark of ‘data’. Where profits from user-information has been the money spinner for so many internet business, new GDPR means they’ll be needing consent from EVERY client before selling info to third parties. Long-established broker houses, trusted by their clients who can always pick up the phone and speak to an actual person, haven’t needed to rely on such revenue streams and will be more trusted if needing to reach out on data protection changes.
Yes, of course sterling will get further battered if we crash out, but in my opinion, it’ll offer a huge opportunity for brokers who want to stand out. Banks went online because, in argument, that reflected the changing habits and needs of their customers. That the last decade has also seen telephone customer service outsourced to India suggests there may have been the happy ‘accident’ of costs being cut. Hurrah!! The general banking public, whether by preference or necessity, are being moved online. But in my private FX experience, there are still plenty of clients, whether a reflection on the generation or the expectations of wealthy individuals, for whom the personal touch is both sought and expected.
Perhaps clichés to the millennial thinking, but being treated like a VIP, with specific contacts with whom you can build a rapport and understanding, helping with trading strategies as well as UK-based pre and post-trade care, does still count. Otherwise, why would HSBC have their Premier and Barclays their Wealth? Coutts their existence? Metro Bank growing a business focussed on the ground-breaking concept of customer care? It isn’t reinventing the wheel; just slowing the car down and making it round again.
This, of course, does not mean a downing of algorithm tools and dumping of an online presence. For every Metro Bank argument there’s a First Direct award-winning counter, and in the years ahead you’d expect the volume of transactions online to dwarf the recorded-line telephone call. But the ATV? If the UK economy and sterling slump, there will need to be a willingness for quick analysis and agility to ensure you’re on top of every client and every penny. And The best way to do that? My revolutionary suggestion? SPEAK.
A conversation on the phone is still the only true guarantee of engaging communication; of understanding your clients’ circumstances and expectations; of having the opportunity to gain their commitment on trust and service. Emails, voicemails, texts and alerts cannot replace the salesmanship of the incentivised dealing desk.
Is the human approach more expensive than an online drive i.e. wages more expensive than a Google-Spend? Yep. Is it tangible to understand on a spreadsheet what you do or don’t win depending on whether the contract is verbal or otherwise? Nope. So my suggested approach (of which I am passionate) is anecdotal and based on a trust in staff to want to do their job successfully. It means a company taking a leap of faith in its most unique sales tool, whose advice on what motivates clients at any given moment can be simultaneously beneficial to directing a digital strategy.
A new Fin Tech needs a foothold, so prioritising an ambitious client acquisition model and share of market, primarily by offering aggressive pricing on a spread matrix, makes sense. All of which is fine if the new client numbers continue to grow and you can stay profitable whilst offering prices that, at times, will make pennies. But if GBP/EUR hits parity and something has to give in that model, the decades-old formula of a bespoke service and high level of care could well return as the decisive USP.
Should the EU and UK not agree on a solution and sterling take that inevitable battering, the trends in client behaviour and changing dynamic to a portfolio summarised earlier are likely to continue. Private FX desks will be up against it for a difficult-to-calculate period of time. But for those tasked with making money through the fallout, it would be wise to remember that Darwinism is often misunderstood as ‘survival of the fittest’. It is not. It is survival of the most adaptable.