The great foreign exchange rip-off is coming to an end

By M.R.

SOME years ago, when Gulliver was a wide-eyed reporter on his first business trip, he sidled up to a bureau de change in London’s Heathrow Airport to buy some foreign currency. His nervous excitement quickly turned to dismay when the teller gouged 12% from the transaction, justifying the theft by tapping on a display-screen of ruinous exchange rates. Today, Gulliver knows better than to buy foreign currency at an airport. But many do not: in 2016 Heathrow raked in £50m ($68m) by renting retail space to bureaux de change. New technology and startups could soon change that.

Savvier travellers have, until now, bought their foreign currency in advance from bureaux de change outside the airport. Higher competition and lower costs mean that these firms trade closer to the interbank exchange rate—the price at which two currencies are actually swapped by financial institutions. Yet all middlemen need a mark up, so they still add a margin of 2-5% to their “commission-free” quotes.

A new breed of “challenger banks” wants to bring that racket to an end. Revolut, a financial-technology (or “fintech”) startup that operates solely through its mobile app, is leading the charge. Like a traditional bank, it gives customers a British current account and a prepaid debit card. Unlike one, it offers live interbank exchange rates for overseas transactions that users can lock in on the app. Other fintech rivals are also squeezing the margins that traditional firms charge and, in some cases, forcing them to adapt. In 2016, Santander, a high-street bank, admitted that it was charging six times more for international cash transfers than TransferWise, a digital rival. Amid mounting pressure, last month it launched a new platform, One Pay FX, that uses blockchain technology and claims to be even cheaper than the challengers.

Revolut and TransferWise are just two fish in a growing pond of startups aiming to upset the established order of Britain’s retail banking sector. Other newcomers, such as Monzo and Starling Bank, focus on domestic transactions rather than foreign exchange. All appeal to younger generations through their digital apps, which are cheaper to run than bricks-and-mortar banks and bureaux de change.

Of course, finance is not the only industry grappling with digital disruption. Hoteliers and taxi firms used to take advantage of their position just as banks do, until Airbnb, a website for booking overnight stays in other people’s homes, and Uber, a ride-hailing app, exposed them to greater competition. The banks and bureaux de change can take comfort from the fact that old habits die hard. Some travellers will still need to buy physical currency before they travel abroad, which generally attracts higher handling costs and commission margins than digital money. Not all places have cash machines and some, such as rural Germany, do not even accept card payments. On an emotional level, many people think uploading one’s wealth to a mobile app is riskier than locking it up in a bricks-and-mortar bank—whatever the legal guarantees. Yet the same can be said about stepping into unmarked cars, or staying in strangers’ homes. And that has not stopped Uber and Airbnb thriving. Heathrow’s bureaux de change should enjoy their 12% wedge while they can.