White-label out-sourcing takes off in forex sector Reuters, 07.21.03, 3:14 PM ET
By Gertrude Chavez
NEW YORK, July 21 (Reuters) - White label is not a brand of whiskey or a record company, but a rapidly expanding segment of the huge global foreign exchange business.
Faced with thinner margins and falling trading volumes, big banks like Citigroup (nyse: C - news - people), Deutsche Bank <DBKGn.DE> and UBS <UBSZn.VX> have embraced white labeling, which basically entails providing liquidity or quoting rates to second-tier banks in a range of currencies on behalf of their clients.
White-label agreements are supported by seamless "straight through processing" to ensure trades are executed, confirmed and recorded.
Harpal Sandhu, president and CEO of Integral Development Corp, a provider of forex trading technology in Mountain View, California, estimates outsourcing deals currently represent about 15 percent of foreign exchange volume done by big banks.
Global forex trading volume is about $1.5 trillion a day.
Bankers say anonymity is a major consideration, with the liquidity provider being just a "white label" to customers of small institutions, letting large banks maximize technology to scoop up flow from sectors outside their target markets.
"For a bank offering a white label solution, the value proposition is the ability to tap into markets and selling channels to which they would not otherwise have access," said Mark Galant, chief executive officer and founder of GAIN Capital in New Jersey, an online trading firm which launched a white label product in May 2000.
White labeling also allows smaller banks to focus on sales without having to worry about technology, giving their clients access to more efficient and sophisticated trading models.
"For the small bank, (the advantage) would be the ability to quickly roll out proven trading technology with relatively no upfront cost. This allows them to focus their resources on selling and existing customer relationships," said Galant.
MERGER, TECH BOOM SPUR WHITE LABEL
White labeling is not new but bankers say the merger mania that swept the financial sector in the 1990s and the boom in new technology fueled a resurgence of liquidity outsourcing.
Consolidation in the industry has also reduced the amount of forex interbank transactions, pressuring profit margins and creating the need for smarter technology and outsourcing.
"As a result of all these mergers, the number of participants in the interbank market has been decreasing over the past several years," said Vikas Srivastava, global head of Citigroup unit CitiFX e-commerce in New York, which launched a platform called CitiFX White Label in October 2002.
"For the small banks, it became harder and harder to make money in the interbank market as the top dealers secure greater market share. One way to optimize their business is to partner with these big banks," Srivastava said.
Technology now allows banks streaming access to liquidity in traditionally difficult sectors such as the spot market, analysts say. As telephone trading gives way to online transactions, smaller institutions are seeing the wisdom in adopting a system from another bank.
WHITE LABEL EXTENDED
The entry of major players has expanded the limits of the transaction, letting smaller institutions outsource practically everything in the forex arena.
Deutsche Bank extended outsourcing by white labeling its order management systems to let partner banks forward client orders, and Citigroup allows access to its trading platform not only to white label partners but also to their clients.
More banks are keen to join the action. Bank of New York (nyse: BK - news - people) is considering launching a white label liquidity platform, according to Richard Estes, the bank's head of FX e-commerce, to complement its IFX Manager launched in 1999.
IFX Manager is an e-commerce product that handles the trading execution needs of fund managers.
HSBC <HSBA.L> in April said it signed a letter of intent to partner with Reuters <RTR.L> on a white label forex trading service. Tony Cripps, head of e-commerce at HSBC Global Markets, said the bank is looking to launch the platform in the fourth quarter of the year.
FX AN "AGGREGATION RACE"
"In the end, the FX market is an aggregation race," said Steve Metzler, global head of FX nontraditional products at ABN Amro <AAH.AS> in Chicago, which launched a white label product in 2000.
"As the industry gets squeezed as a result of consolidation, we need to extend what we have. To run a truly global operation ... we need to extend our business models to other financial institutions," Metzler said.
The ultimate beneficiary is the end-user or the clients of small banks since, as competition heats up, they get more services at lower prices. But as margins erode due to increased competition, analysts say big banks with reasonable costs should be able to thrive.
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