Unwary travellers have long been bilked by bureaux de change, especially in airports, but fintech start-ups are on a path of disruption in retail banking.
Bureaux de change in airports are notorious for extracting hefty transaction fees from travellers in need of foreign currency. London’s Heathrow Airport brought in £50m ($68m) in 2016 by renting retail space to bureaux de change. Savvier travellers have typically bought foreign currency from bureaux de change outside airports, where rates are better due to more competition and lower operating costs; however these are still middlemen, and as such, they add a margin of 2-5% to the interbank exchange rate, even if they claim to offer “commission-free” quotes.
This scheme is beginning to change with the rise of fintech and new “challenger banks”. Digital banking start-up Revolut, founded in 2015 and based in London, offers currency exchange, along with peer-to-peer payments, debit card and cryptocurrency exchange services through its mobile app. Revolut offers live interbank exchange rates on weekdays, and charges a mark-up of just 0.5% to 1.5% on weekends (as of this writing).
Other firms in the financial technology space are outpricing traditional firms as well, and even forcing them to adapt. As The Economist reports, in 2016 Santander “admitted that it was charging six times more for international cash transfers than TransferWise, a digital rival.” The competitive threat has prompted Santander to launch One Pay FX, a blockchain-based foreign exchange platform, which it claims charges lower fees than its fintech challengers.
Other disruptors in the retail banking sector include fintech start-ups such as Monzo and Starling Bank, which focus on domestic transactions rather than foreign exchange. All have two prime advantages: They are a natural choice for younger customers, and the cost of operating a digital app is virtually nil compared to bricks-and-mortar banks and bureaux de change.
New competition does not spell overnight doom for banks and bureaux de change, however, as some travellers still need to buy physical currency before going abroad. Further, not all destinations have cash machines, and in some rural areas, card payments are not accepted. There is also a lingering fear factor, particularly among older customers. Higher handling costs and commission margins apply.
Fintech start-ups that are staking claims to the currency exchange business could be following in the footsteps of earlier travel industry disruptors with digital platforms. Hotels and taxi companies, which could once comfortably have their way with customers, now must grapple with competition from the likes of Airbnb and Uber.