Rip-off merchants – they are the scourge of a decent holiday. Hotels that charge twice what they would ask at any other time of year; airport car parks that make you think it would be cheaper to take taxis; dodgy Mediterranean restaurants that pretend that some leathery bit of old fish is today’s catch. Who hasn’t had a holiday that has ended up costing far more than expected?
But the biggest rip off of all has to be foreign currency exchanges. How much do we lose in the process of changing our pounds into euros, or dollars? 6% maybe, if we are lucky. Each time we set foot outside these shores we hand over a large chunk of our money just for the privilege of being given another lot of money in return.
My wife tells me that the best place to buy foreign currency is a little kiosk down an alleyway here in Oxford. So off I go with my £200. The guy beyond the desk gives me £200 worth of dollars less his 6%, so £188 worth of dollars.
Behind me are Hiram and Myrtle, over here from the USA. They want my £200, so the kiosk merchant gives them this in return for £200 of dollars, plus, of course, his 6%. So this dealer has ended up exactly where he started only he is £24 better off for doing nothing more than shuffling paper across the counter.
Frankly it is a rip-off, but with every rip-off comes the opportunity to do something better and cheaper. And that is the opportunity that was spotted by one Aim-listed penny share company – one that seems so obvious to me that I can’t believe it wasn’t done before.
Why I think this business is just a racket
When you buy foreign currency, you probably do it through a bank. I am a customer of HSBC whose pathetic advertisements of its global network make the Heathrow experience even more depressing than it is already. If I go to Hong Kong why cannot HSBC just let me have a few of the many HK banknotes that it must possess, without charging me 6% for the privilege of getting my hands on my own money?
I mean are we supposed to believe that all those ten pound notes that are presented by British tourists in New York have to be shipped back to London by an armed flotilla of warships? Why does it cost so much? These days most financial transactions involve no notes and coins at all. They are just electronic transactions. If tsunami videos can be instantly viewed all over the world thanks to the wonders of digital transmission, why are we still asked to believe that money transfer is such a difficult process?
What’s the alternative? Well Hank Uberoi, who has taken over the reins at AIM-quoted Earthport (EPO), has spotted an opportunity. Before going on my own holiday I spoke to Hank who did not endear himself by recounting his feats at Goldman Sachs and a hedge fund called Citadel. This does not necessarily fit him to run a small quoted company, but he and his colleagues can hardly do worse than the previous management.
The local banker trying to crack this market
Earthport has a rotten record. But Uberoi believes that the company has a good central idea. He said that the basic proposition is all about ‘netting’ and ‘local payment’.
Think of it this way. If lots of English people exchange pounds into pesos in a bank in Manila, and lots of Filipinos exchange pesos into pounds in a London bank, there is little point in settling every transaction in full. Much better to simply net off the difference of the aggregated transactions and make one balancing payment. This strikes me not just as a good idea, but one that is so obvious one can only wonder why it has not always been done this way.
But Earthport seems to be pioneering this process. It has been setting up bank accounts all over the world, making sure it conforms with money laundering and other regulations, receiving approval from bodies such as the FSA and now it is starting to orchestrate the whole settlement process.
The biggest challenge has been to persuade clients to sign up. Nobody is going to fire large sums of money into the digital universe without being entirely confident in the system but recently Earthport has announced some new clients. Although it is still loss-making this is a business that could really scale up. Definitely one to watch.
• This article is taken from Tom Bulford’s free twice-weekly small-cap investment email The Penny Sleuth. Sign up to The Penny Sleuth here.
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