If you want to outshine the competition, understanding the nitty-gritty of foreign exchange (FX) and revenue generation is key. Fintech companies that rock at optimising their FX strategies and revenue models can gain advantages in the market.
In this article, we'll explore important aspects — point by point — of keeping your revenue in the black when it comes to FX.
Understanding commonly used terms
Before we dive into the specifics of FX and revenue generation, let's get familiar with some commonly used terms:
- FX Spread – this refers to the difference between the buying and selling prices of a currency pair. It represents the cost involved in converting one currency into another.
- Sell Side vs Buy Side (LHS/RHS) – in FX trading, the sell side refers to the party selling the currency, while the buy side represents the party buying the currency. LHS (left-hand side) and RHS (right-hand side) indicate the base and quote currencies, respectively.
- Spot / Today / Forward – these terms denote the settlement dates for FX transactions. Spot implies immediate delivery, Today indicates same-day settlement, and Forward involves a future settlement date.
- Initial Margin / Margin Call – initial margin is the collateral required to initiate a leveraged position. A margin call occurs when the margin account falls below the minimum, prompting additional fund deposits to meet the requirements.
- In the Money / Out of the Money – these are commonly used in options trading. In the money refers to an option that has intrinsic value, while out of the money indicates no intrinsic value.
- Swaps – derivative contracts that allow parties to exchange cash flows or liabilities based on predetermined conditions, such as interest rates or currencies.
If you are reading this, you might be considering offering customers multiple currencies and should also familiarise yourself with different types of FX transactions, the life cycle of an FX transaction and the cut-off times of such transactions. More on these topics can be found in one of our Fintech Fast Facts article series here.
Now, it’s time to talk about revenue.
How does your market generate revenue?
The revenue generation model of a fintech company depends on its geographical location and the services it provides.
- United States – in the US, revenue is often generated through interchange fees charged by banks for processing credit and debit card transactions.
- United Kingdom / Europe – Fintech companies in the UK and Europe offer foreign exchange services, facilitating currency conversion for individuals and businesses while charging a fee.
- Rest of the World – in other parts of the world, such as Asia-Pacific or Africa, revenue can be generated through settlement services, providing efficient and secure cross-border payment solutions for businesses and individuals.
You will also need to have a grasp of the level of risk associated with revenue generation. Lower-risk services may have narrower profit margins but higher customer expectations, while higher-risk services can yield higher profit margins with lower customer expectations.
What about customers and their needs?
Understanding your customers
Above everything else we’ve mentioned, customer centricity is the most crucial aspect of any business. How, when and under what circumstances FX revenue opportunities exist are dictated by the demands and product gaps consumed by your target customers. Here are a few handy points to think about…
- High frequency / low volume vs. low frequency / high volume – determine if your customers engage in frequent but smaller transactions or infrequent but larger transactions. This will help tailor pricing and services to meet their needs.
- Cross-border vs. domestic – identify if your customers use cross-border transactions, such as diaspora remittances or SME trades, or if they focus mainly on domestic business. Each segment has its unique requirements and challenges.
- Understanding your customers' psychology – be aware that customer expectations can be influenced by market conventions. How will your pricing and services align with prevailing market practices?
- Understanding your market – geographical and industry-specific factors may influence customer behaviour. An understanding of your market will help you to create tailored solutions and pricing strategies.
After you’ve thoroughly studied your customers, their location, and their purchasing/usage habits, it’s time to look at different pricing models.
Exploring your options
Fintech companies have a range of options when it comes to revenue generation models. These are the most common:
- Volume-based / monthly minimums – charge customers based on transaction volume or set monthly minimum requirements.
- Monthly subscriptions – offer subscription-based pricing models that provide customers with access to specific services or premium features.
- Per transaction – charge customers on a per-transaction basis, whether in real-time or based on the transaction amount.
- Fixed fee & percentage – combine a fixed fee with a percentage of the transaction value, commonly used in FX transactions where a margin is added to the exchange rate.
- Tiers – implement tiered pricing structures that offer different levels of service based on customer needs and usage.
To gain a competitive advantage, fintech companies have to optimise their FX strategies and revenue models. By delving into FX, revenue dynamics, and customer behaviour, fintechs can develop cutting-edge strategies that meet customer needs and maximise profitability.