Canadians can pay as much as 2.5% in currency conversion fees which are hidden in what is known as “the spread”. If you are a small business and you convert $5,000,000 per year between US dollars and the loonie, a 2.5% spread means your bank earned roughly $125,000 before costs (which I think we can all agree are not going to be close to $125,000).
A firm based in Toronto has set up shop to compete with the banks in fulfilling the currency conversion needs of customers. Their goal is simply to reduce the spread, which translates into more money in the customers’ hands at the end of the day, and a slice of the pie for the firm. They would earn less than a big bank, but it’s a business of volume and there is a big pie out there.
The President of the company is a reader of this blog and I asked him to answer a few questions to share with the readers. This is not a sponsored post, nor an endorsement – just thought it would be of interest. Here are the questions I asked, and the answers as given by Rahim Madhavji, the President of Knightsbridge Foreign Exchange Inc.:
1. Explain in a nutshell what you do.
Knightsbridge provides better than bank foreign exchange rates (and free wire transfers) to individuals (i.e. foreign property buyers, estate transfers, car/boat, and other large personal FX requirements) and small and medium sized businesses. Knightsbridge provides its clients the level of service banks provides to its largest clients (market commentary, unique understanding of FX requirements, FX rate alerts, market orders, risk management policy development, and hedging tools – ability to lock in an exchange rate today for the future). When dealing with a bank, customers often speak to a “representative” that does lending, mortgages, visa, chequing accounts, etc. All we do is foreign exchange – we have to be better than the bank – otherwise no one would use us.
2. How are you able to provide better rates than banks?
Banks have a monopoly and significant market share. As a result, they charge high currency margins. Banks don’t pay much attention to the small business banking market. Knightsbridge’s management team has strong relationships with financial institutions (Knightsbridge’s CEO is the former global co-head of RBC’s FX sales and trading group), which allows Knightsbridge to obtain superior pricing.
3. Why don’t more firms do what you do?
Currently, there are several competitors in the marketplace, especially in the UK, and there are several regional participants in the U.S. and Canada. However, due to stricter anti money laundering and terrorist financing legislation, barriers to entry for new participants are increasing. Because banks ultimately provide foreign exchange and liquidity services to all market participants, they are selective with whom they work with, and do significant diligence prior to allowing companies such as Knightsbridge to partner with them. Knightsbridge’s primary banking relationship is Bank of Montreal, and all client funds are held with BMO or other Canadian banks. Also, Knightsbridge is regulated by FINTRAC.
4. Are you as safe to deal with as a bank? Why?
- Knightsbridge is a foreign exchange and payment company – as funds are received they are sent to the beneficiary. Think of PayPal, Western Union, but much better FX rates and no wire transfer fees.
- Knightsbridge does not hold deposits on behalf of clients. Client funds are sent to the beneficiary, generally, by the end of the day.
- Strong management team. Rob Wittmann, CEO of Knightsbridge, has over 30 years of financial services experience and is the former Global Co-Head and Managing Director of RBC’s FX Sales and Trading group.
- Rahim Madhavji, President of Knightsbridge, former investment banker at RBC and worked at a $550 million private equity fund.
- Michael O’Neill, Knightsbridge’s head trader, has 30 years of foreign exchange experience at global financial institutions.
- Knightsbridge is registered with and regulated by FINTRAC (Financial Transactions and Reports Analysis Centre of Canada).
- Knightsbridge’s primary banking and FX liquidity relationship is with the Bank of Montreal. The Bank of Montreal has conducted diligence, including reviewing Knightsbridge’s comprehensive compliance policy, prior to establishing client trust accounts, payment, and a liquidity relationship with Knightsbridge.
- Knightsbridge’s works with TSX listed and private equity portfolio companies.
- Knightsbridge has no bank debt.
- Knightsbridge only operates on a “cleared funds” basis with clients (no settlement risk) and has policies and procedures in place to prevent fraud.
- Knightsbridge does not extend credit to clients.
- Knightsbridge does not take open market positions, and as a result is not exposed to market risk. All transactions are covered immediately (i.e. back-to-back). Forward contracts require margin to be posted to ensure against contract default.
- Knightsbridge has developed and provided a comprehensive, risk based Anti Money Laundering and Terrorist Financing Policy Compliance Manual to our liquidity providers and banking relationships.
- Knightsbridge has also developed a comprehensive business plan, which incorporates data backup and business resumption plans, as well as detailed client on boarding and transaction processing requirements.
- Knightsbridge and its clients are mutually bound by the terms and conditions found in the client application form.
5. What are the smallest and largest transactions your firm handles?
Minimum of $15,000 and maximum of $40 million. Anything larger or smaller is on a case by case basis.