ECB Finds European SMEs Grossly Overcharged for FX Services
(United Kingdom - 20 June 2019) A new paper from the European Central Bank (ECB) declares banks across the Europe Union (EU) earn millions of euros a year from overcharging small corporate customers for foreign exchange (FX) services. The research is the first data-driven study of the closed off dealings of FX derivatives pricing, adding weight to anecdotal evidence that smaller corporate clients pay higher rates to manage their currency exposure.
In some cases the rates were found to be up to 25 times higher than larger corporates the researchers found. The study analysed half a million Forward FX contracts for the EUR/USD. The deals were arranged privately between more than 200 banks and more than 10,000 clients ranging from large multinationals to small import-export companies.
Banks collect an extra €638 million a year on average as a result of discriminatory pricing in EUR/USD contracts. The majority of corporate clients pay about 50 basis points on contracts on which the largest institutional enterprises pay just 2bps. The research indicated that there was little difference in pricing for the length of contracts. Rates instead tended to be determined by the bank’s perception of the client’s expertise in currency transactions. Of the 10,087 companies in the study, more than half traded currencies with just one bank, paying on average 14 times more than companies that received quotes from five or more dealers.
The US $5.1 trillion per day currency market is concentrated in the hands of the tenlargest dealers, which collectively have a share of 65 percent of turnover according to the latest industry survey. Banks are pushing back against regulators efforts for the market to become more transparent, arguing that additional disclosures around costs they charge for forex contracts have little real value for clients.
“The elephant in the room is that dealers systematically and consistently overcharge clients who don’t have currency trading expertise,” said Harald Hau, a professor at the Geneva School of Economics and Management and lead author of the soon-to-be-released paper. “It’s the equivalent of walking into a used-car dealership and paying €50,000 for a car that others can buy for €5,000,” said Mr Hau. “The price discrimination occurs systematically against the less sophisticated market participants, namely small export and import companies. Over-the-counter dealers have always claimed that contract customisation allows for more corporate hedging, but the large price discrimination faced in particular by SMEs suggests the opposite is true,” said Mr Hau.
“For the first time we can measure the quality of the market for different participants. And what we see looks terrible from a public policy point of view,” said Mr Hau. “The opaqueness of the market is now much more difficult to defend.”
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