Why can’t big banks succeed in the Retail Forex industry?

Barclays Margin FX exit is just the latest in a string including Deutsche Bank, Goldman Sachs…

As the global retail forex market has grown and matured — with retail forex volumes hitting an all-time high in mid 2013 — the predictions of many industry observers included an increasing presence of leading ‘traditional’ financial institutions in the retail forex industry. The argument, quite simply, was that big financial institutions are not early adopters nor innovators, but once the industry became more established and showed sustained profitability, the big guys would quickly swoop in to either buy or build their own solutions.

Well not only has that not happened, but rather quite the opposite. We’ve seen a number of large brand name financial houses dip their toe in the sector, but more often than not they withdraw soon after. The latest example of this was Barclays, which we exclusively reported has just closed their entry in the retail forex sector, Barclays Margin FX. 

Barclays is actually in good company here. Barclays follows in the footsteps of Deutsche Bank, which shuttered the somewhat successful (at least for a while) dbFX in 2011, selling dbFX assets to Gain Capital for very little consideration. Goldman Sachs was the major outside backer of UK-based LMAX, but less than two years after making its investment Goldman Sachs pulled out of LMAX in early 2012, dumping its 12.5% LMAX stake to partner Betfair at a substantial loss. Goldman Sachs remains a shareholder in UK retail spreadbetting firm CMC Markets.

So what’s wrong here?

Well it seems that the retail forex sector is just not built for the large, conservative, slow-to-move financial giants. The forex sector has been built up mostly by risk-taking entrepreneurs, a skill not always valued by big banks. The forex industry thrives on aggressive marketing and heavily incentivized employees — outside of investment banks, again not the forte of white shoe financial institutions. And big banks’ biggest advantage in entering new businesses — large amounts of capital — isn’t really needed in the retail forex sector, despite recent increases in required capital and more stringent and costly regulations for forex brokers.

The only remaining significant ‘big bank’ brand in the retail forex business is Citi, with its CitiFXPro brand, although it too is geared more toward high-net-worth retail and the small institutional market.

Will big banks eventually make their way to the retail forex sector? Please share your thoughts and comments with us below.

For more on the global Forex industry see the LeapRate-Dow Jones Forex Industry Report.

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