How XE’s Beric Farmer turned foreign exchange rates into a real business

With all the activity in foreign exchange these days, it’s easy to lose perspective on where we came from. Back in the early 1990s, a new Canadian company began doing something kinda novel on the Internet: providing foreign exchange rates. Founded by two high school buddies, XE was an internet and fintech pioneer.

XE co-founder Beric Farmer joins us on the podcast this week to talk about his journey, some of the things he did right, and one major lesson he learned on the way to selling his fintech company to Euronet.

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XE began about 25 years ago. Can you tell us the story?
It actually started in the  early 1980s when my co-founder, Steven Dangler, and I met in high school. Steve was a dreamer and one of the things he dreamt about was creating a company one day. This fictitious company he named Xenon Laboratories, whose first letters and logo were XE. Steve still has textbooks from Grade 9 with doodles of the XE logo. As we were both graduating from university in 1993, Steve approached me with the idea of starting a company. I took him up on his offer and I don’t think we ever had a discussion of what to name the company.

How’s the business doing today?
We have our website and our mobile apps. We estimate we have about 280 million unique users a year that use our services to help them make decisions about exchanging currency and to actually exchange currency. Our mobile app has had over 60 million downloads. It’s a long way from my parents’ basement. Now we’re part of a larger public company, Euronet,  with resources and capabilities we couldn’t have dreamed of back then.

Why foreign currency?
We pivoted from being an Internet Service Provider for schools and we started helping businesses take advantage of the internet. In early 1995, we first encountered an interactive website. You could type something into a field, click a button, and the website returned customized information. We created a proof of concept website with a currency converter, called the Universal Currency Converter.

I don’t think we appreciated how useful that was for a large number of people.  It quickly started gathering an audience. XE has always been technology driven and technology focused. It was the pursuit of a new technology that enabled us to discover — eventually — a new business model.

With the benefit of hindsight, what would you have done differently along the way?
You have to find a balance as an entrepreneur between knowing when you need to respect the wisdom of other people and when you need to ignore their advice. In the early days, I wish I could have told myself to have more faith in my own insight and abilities and not get starstruck by other people who seem accomplished and seem to have all the answers.

‘More transparent forex is a race to the bottom’: How Kantox’s technology automates FX exposure for SMBs

Multinational companies transacting in multiple currencies have more to manage than the average SMB. Owners of ecommerce, travel, and digital advertising companies not only have to run a profitable business, but also develop strategies to limit forex risk to secure profits.

But figuring out when to sell Pounds or when to exchange Euros for Dollars is only half the battle. Relying on a bank or employee to execute complex strategies leaves a margin of error that can lead to hard earned profits disappearing.

One fintech upstart looking to limit the risk involved with managing FX positions is the London-based Kantox.

Most FX startups preach transparency and lower fees than when solving the FX problem, giving a side-by-side comparison with banks and showing the price difference. Kantox went in a different direction by building a technologically-advanced platform to proactively help solve a SMB’s needs

“In fintech, and specifically FX, companies’ strategies were marketing driven: educating the market that FX isn’t transparent and then presenting a more competitive solution,” said co-founder and CEO Philippe Gelis. “But at some point we need something more, mainly advancing technology.”

Kantox’s technology solutions range in complexity from simple processing of FX orders to complex APIs and payment hubs. An SMB can connect its Treasury Management System to the Kantox platform, allowing for simultaneous payments in multiple currencies to destinations all over the world.payments_hub_-_kantox

One of Kantox’s newest products is its Dynamic Hedging solution. The software allows companies dealing in multiple currencies to automate their FX exposure. Clients input currency exposure strategies, and the software automatically executes the game plan.

Trying to tackle forex exposure tactics à la Transferwise or WorldRemit would only offset price. But for SMBs, lower costs are a good thing, but not everything. Moving $500 to your wife’s account in Estonia is a lot different than paying 11 vendors in four different currencies by midnight or you’re out of business.

“Our view was that in the long run, trying to be more competitive with transparent forex companies is just a race to the bottom,” explained Gelis. “We focused on how to bring more than savings to a business. This is why we’re gaining traction; clients appreciate value over price.”

Even though Kantox isn’t using the same model as low fee forex companies doesn’t mean transparency isn’t important. Kantox displays the mid market rate to clients, and is open about what it charges: five basis points on the FX rate and a per trade fee that depends on the size of the client. At the end of the month, SMBs using the software get an invoice with a monthly summary of fees.

Kantox is still small when it comes to FX. $4 billion has moved through the platform since its inception in June of 2011, and Dynamic Hedging has seen over $100 million in transfers since its launch. That’s a great start, but not close to becoming “mainstream”.

The tools that Kantox’s software provides allow managers to focus on running their businesses, not executing FX payments. SMBs still have to come up with hedging strategies to protect their profits, but can spend significantly less time on payments.

The forex trading social network (podcast)

On Tradestreaming Radio, we’re interviewing lots of innovative entrepreneurs, investors, and researchers all trying to make investors better at what they do. Check out our archives. Subscribe on iTunes.

Today’s guest on Tradestreaming Radio is Dave Lemont, CEO of social network forex trading platform, Currensee.com
Currensee was founded on the assumption that the traditional way forex traders shared and learned from one another — the message boards — was broken.

Enter the social network for currency traders. First, Currensee required that all members open an active trading account, allowing the company to audit results.From there, the company introduced auto-trading, the ability to link a user’s account to another’s and have all trading replicated. Experts — trade leaders —  bubble up and make money by helping others make money.

We’ll see how the company evolved and how forex traders are using new media to book profits for their own accounts and enable others to do the same.

Timing is good — Currensee announced the unveiling of its Currensee Portfolio Builder™ at finance-tech conference, FinovateSpring2011.  The company announced today:

Portfolio Builder will give investors the ability to assess and manage potential performance and risk before investing. The Currensee Portfolio Builder gives investors access to an innovative, real-time graphical display that helps them build, preview and test different investment scenarios so they can create balanced and diversified portfolios.

Listen to the whole program

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The new new carry trade in the age of derivatives

Investors have made money for decades by borrowing in one currency with a low interest rate and exchanging it into a higher interest rate currency.  Called the carry trade, it made a lot of people of lot of money.

A new paper out by Della Corte, Sarno and Tsiakas has found another way to profit off the carry trade.  These economists use the forward volatility in foreign exchange to derive a very profitable strategy.  According to their research, Spot and Forward Volatility in Foreign Exchange, investors can buy and sell what’s called a forward volatility agreement (FVA).

Simply put (kinda), thes FVAs attempt to predict future volatility in a certain currency.  More specifically, the FVA sets a forward implied volatility by making a guess about future spot implied volatility.  These guesses tend to be wildly off:

Forward volatility is a poor predictor of future spot implied volatility

So, if forward vol is a bad predictor of future vol, investors can design strategies to take advantages of this.

For example, buying (selling) FVAs when forward implied volatility is lower (higher) than current spot implied volatility will consistently generate excess returns over time.

Interesting idea — as for me, I’ll stick with momo stocks like $AAPL and $PCLN but this sounds like a promising strategy for forex traders.

Source

Della Corte, P, L Sarno, and I Tsiakas (2010), “Spot and Forward Volatility in Foreign Exchange”, Journal of Financial Economics, forthcoming. Centre for Economic Policy Research Discussion Paper 7893.