Banks have been accused of overcharging small customers for their Forex services. ECB papers can be up to 25 times higher than those of bigger clients. Hedging rates can be over 25 times higher when compared to those who have much bigger clients. This opinion has been shared on Twitter and it is going to have detrimental consequences to say the least.
Banks across Europe can earn hundreds of millions every single year by overcharging small and corporate companies. This is according to a new paper which has been done by the opaque world of Forex derivatives. It supports anecdotal evidence that appears to show that smaller and more corporate clients seem to pay much higher rates for protection against the fluctuating exchange rates. In some cases, these can be way over 25 times higher than those customers who are somewhat more sophisticated. The elephant in the room is that banks are overcharging clients who do not have any experience in trading currency. This opinion was formed by Harald Hau who is a professor over at the Geneva School of Economics. The study interviewed half a million contracts who are locked into an exchange rate. This is going to be paid in the near future and it would appear that the pair is going to be affected too. A lot of the deals were actually arranged privately, and this is going to be done between over 200 banks too. This is going to affect 10,000 clients and this ranges from multinationals to the smaller import companies. It is the equivalent of walking into a car dealership and paying over 50,000 euros for a car that anyone else can buy for 5,000 euros. The leader of the study has also stated the findings from the study were somewhat stark. Banks are collecting well over 638 million euros a year (on average). This is the result of a discriminatory pricing for the euro and dollar contract. A lot of corporate clients are paying 0.5 percent on any contract. The bigger companies however are paying 2bp. The price discrimination occurs systematically, and mandated banks are now having to report details of their trades to any regulators.
The paper is going to be based on the new and even updated version of the findings that happened to be published in the year 2017. Banks have argued that there isn’t much difference between the lengths of the contracts. The rates do tend to be determined by the bank’s own perception of the client’s expertise across all of the transactions. Dealers have also claimed that the contract customization gives people the chance to account for hedging too. Even so, the price difference has been noted that small companies choose to take the risk even though currencies may move against them. They choose not to pay the high price of buying any kind of protection. Out of the 10,000 plus companies who were involved in the study, it is important to know that half of them traded with a single bank alone and that they paid way more than 14 times more when compared to companies who obtained quotes from 15 or more banks. The market right now is concentrated because there are 10 large dealers. They have a total share of 65% of the market and banks are also trying to resist efforts to make the market more transparent. They are trying to obtain additional disclosures and they are also trying to offer very little value to the people who they work with. Right now, it may be possible to measure the quality of the market for different purposes but right now, it’s important to be aware.