Dr. John Min, Chief Economist at Monex USA sits down with Carmen Murphy, VP of Events and Education at Wespay to demystify cross-border payments.
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Full PODCAST Transcript:
00:00:00 Carmen Murphy, VP of Events at Wespay
Hello everyone. Welcome back to the Payments Perspective podcast by Wespay. My name is Carmen Murphy and I am the Vice President of Events and education here at Wespay. Today I am pleased to welcome Dr. John Min, the Chief nerd Economist.
00:00:19 John Min, Chief Economist at Monex USA
Yes they call me Nerdy at Monex.
00:00:23 Carmen Murphy
He is joining us today to talk a little bit about foreign exchange, our goal. John and I both have the same goal and that we hope to eliminate the fear factor when it comes to foreign exchange transactions. And so let’s dive into that. So John, why don’t we start out by just if you could take a second, introduce yourself to our audience and if you wouldn’t mind telling everyone what Monex is.
00:00:57 John Min
Sure. I’m the chief nerdy economist for Monex. We’re a truly global company–we have Monex USA, Canada, Mexico, Europe, Asia. We operate 24/7, we have almost 3,000 employees worldwide, we’ve been in business for 40 years, and we only focus on one financial asset which is foreign exchange. We don’t care about credit debit, anything else.
00:01:22 John Min
We just want to focus on foreign exchange. And we’re very very good at converting one currency to another currency in a very cost effective manner. And the second part, we also deliver funds to 142 different countries. Unlike typical T +2 we do T +1. For those non bankers out there that’s next day.
00:01:46 John Min
A lot of transactions are the same day. Just last Friday we had a freight forwarder they needed to send payment to Mexico right away to release trucks. That was Friday afternoon, close to 4:00. We were able to get it done in 30 minutes.
00:02:02 Carmen Murphy
Oh my goodness, that’s incredible.
00:02:05 John Min
And we only work with businesses, we don’t work with individuals. We’re not like a remittance company like commonly knows like Western Union, things like that.
00:02:32 Carmen Murphy
Okay, okay, that’s helpful. I think that that alone helps kind of ease the mind of what the simplification of what these foreign transactions can mean. They’re not always these big scary things that you need to worry about.
00:02:51 John Min
Oh no, there’s scary things out there but we don’t touch it.
00:02:56 Carmen Murphy
That is very fair. So tell us a little bit. You know on the Wespay hotline we get calls about international wire payments, we get calls about remittance like you mentioned remittance as far as personal person to person, I know you’re in the business space, but I think it still fits? How does it work? Like how does money get around?
00:03:24 John Min
Yeah. So let me first, let me correct the misimpression right away. We work with a lot of financial institutions.
00:03:34 Carmen Murphy
Yes.
00:03:34 John Min
We support a lot of financial institutions to support their service when it comes to making international payments. So there would be remittance along with the B2B payments. But we don’t onboard individuals. So no individuals can just come to our office and say, “I want to open an account and to send money around the world.” But if the credit union, community bank, or regional bank says “we would like to plug into your service using API and be able to send the money around the world,” we are it.
00:04:04 John Min
At the end of the day, there’s a misconception.
00:04:09 Carmen Murphy
Mm.
00:04:10 John Min
When you send a wire to, let’s say, the UK. Once it gets to the border of the United States, it’s not like it gets on the airplane.
00:04:18 Carmen Murphy
Right.
00:04:19 John Min
There’s no continuous transfer of the funds. Each country or each market has their own payment network. Like we have the Fed now or the federal wire system. The UK has their own system. Europe now has SEPA, which is their own community system, but they are not connected to each other. So when you transfer money, it’s really a debit credit exercise of different banks transferring money from one to each other.
00:04:48 John Min
So if you want to transfer money to the UK, your bank will debit your account and will credit the account. Hopefully that bank has a bank account in the UK, so they will credit there, and then the delivery is made. So all this is done through this network called swift—the Society for Worldwide Interbank Financial Communications. It’s nothing but messaging system—it’s instructing one financial institution “I’m going to debit this account. I want you to credit my accountant in your financial institution. (The other side of the pond in this case.) And then I want you to transfer this to the ultimate beneficiary, (which may be that person’s son who’s studying at Cambridge.”)
00:05:37 Carmen Murphy
Yep. Okay. So it’s really nothing more or nothing less than data moving through these networks like it would, you know, within our own transfer.
00:05:50 John Min
Yeah. And if your bank client comes to you and says, “I want to transfer to my next door neighbor,” and next door is banking with you as well, It’s a simple exercise of debiting one account and crediting an account within your bank. It’s exactly the same process.
00:06:06 Carmen Murphy
That makes sense. Okay. Yes, yes. And I think that’s really helpful just from a super basic level for our listeners to understand that it works like other payments.
00:06:18 John Min
It looks just like any other payments.
00:06:20 Carmen Murphy
Yeah. And I think the benefit of having a company like Monex, I mean I know that there’s other, other companies out there that do this but.
00:06:28 John Min
There are actually not that many in the U.S. We’re heavily regulated. We have to get a banking license from every state except Montana because they don’t require one. We get audited by every single one of them annually and then we need to have a performance bond with a certain state, especially California. They want to be really safe.
00:06:49 John Min
So yeah, we are regulated both at state, at the federal level because at the end of the day we’re dealing with someone else’s money. States want to make sure that we are sound, well capitalized, and that we don’t speculate—we just simply transfer the funds.
00:07:11 Carmen Murphy
Yeah. And that’s such a great part about having a partner and a vendor if you’re looking at it from the financial institution perspective, is that they don’t necessarily have to worry about all of those regulations and that you’re talking about because, like you mentioned at the very beginning, you’re the experts in this. Like this is all you do.
00:07:33 John Min
This is all we do.
00:07:34 Carmen Murphy
Yes.
00:07:35 John Min
But at the same time our level of compliance has to be at par or above the financial institutions who are working with us, because at the end of the day we got to make sure KYC / AML are followed closely all the way through the whole process.
00:07:51 Carmen Murphy
Yes, yes. Tell us a little bit if, if you know about how FX exchange, like the rates are determined and how that works. I know I used to work in branches. That was always the hot question when people were trying to move money internationally is “how am I going to know what’s going to be there and what’s going to happen, and which rate do you use?”
00:08:14 John Min
Oh, you’re not going to like my response. So the foreign exchange (FX) market is an $8.2 trillion market per day. So the US economy overall for the whole year the GDP is about 28 trillion. So within four days, the amount of money that’s bought and sold is as big as the US economy. So it’s massive, it’s the world’s largest financial market ever.
00:08:41 John Min
It’s open 24/5.
00:08:43 Carmen Murphy
Wow.
00:08:44 John Min
And it’s not regulated.
00:08:48 John Min
So when you go to the website and you see these foreign exchange rates, these are wholesale rates. Like 90% of all that money is what we call “hot trade.” Speculators, hedge funds, people buying low, selling high. They’re constantly moving money back and forth. Unfortunately, if you’re a small business and you need to get pounds to pay your supplier in the UK, you’re not going to get that rate, that’s wholesale.
00:09:14 John Min
So your bank or whoever is providing the service to you will mark it up. Of course. We call that “markup.” But these are over the counter, OTC for those financial nerds out there, which means that for every transaction, the pricing or the markup is negotiated. So if you take the same transaction, go to three different financial institutions, they’re going to give you three different prices.
00:09:39 Carmen Murphy
Yes.
00:09:40 John Min
In fact, if you go to a mid-sized bank and you talk to one trader, and then compare to the second trader, they’re going to give you two different prices. So no one really knows until you get the rate that’s quoted to you. And if you accept the rate, that’s a legally binding transaction in the foreign exchange market.
00:10:00 Carmen Murphy
Okay, okay.
00:10:01 John Min
So sometimes the mark-up could be 1%, sometimes it’s 3%. I’ve seen as high as 7%.
00:10:08 Carmen Murphy
Wow.
00:10:09 John Min
Yeah. Oh by the way, the worst place to go if you want to is the Heathrow airport and convert your money. It’s like 12, 13%.
00:10:20 Carmen Murphy
Oh my goodness. That’s good to know.
00:10:22 John Min
Yeah, don’t convert money at Heathrow
00:10:24 Carmen Murphy
Heathrow at the airport. Okay. Which I mean, I guess makes sense right there.
00:10:29 John Min
It does.
00:10:30 Carmen Murphy
They’re a for-profit business just you know, trying to make money
00:10:34 John Min
Yeah, exactly. But there’s no regulation that says you can only mark up this much. So you got to pay attention to that…
00:10:44 Carmen Murphy
Yeah, that’s good to know. I think just from a consumer perspective, when you’re traveling and you’re going places. Okay, okay. You mentioned a little bit about, you know, there’s not many who are doing this in the, in the United States. Talk to us a little bit about just the bigger scale of players in the FX market.
00:11:09 John Min
So there are about 4,800 banks in the United States, and I think about 60 are actually doing their own foreign exchange. In other words, they have a bank accounts around the world and they can do debit credit, debit credit all the way to the end. Most of the financial institution banks, credit unions, obviously they do not have the capability, so many of them will outsource to these larger banks. Corresponding banks.
00:11:38 Carmen Murphy
Yes.
00:11:39 John Min
So at the end of the day, it’s kind of like an oligopolistic market. You’ve got a few big banks doing all these transactions and their markup can be very high. Now we are something different. We’re not a bank, we’re a money service business that’s regulated just like Western Union. And there are three or four other players like that in the United States.
00:12:05 John Min
But it’s so hard to open up a business like ours because you have to get a license from every single state, and you get audited. So we call it this effective barrier to entry in the United States. But when you go to the UK there are like 200, 300 companies like us.
00:12:22 Carmen Murphy
Oh wow.
00:12:23 John Min
So there’s so much competition for your business. This markup is very small.
00:12:29 Carmen Murphy
Ah, that makes sense.
00:12:30 John Min
Okay, now from a small financial perspective, if you have a corporate client and they’re doing international business, by the way, we import about $3 trillion of goods from the rest of the world. Half of it is settled in foreign currency, especially imports from Canada and Mexico. You got to send Canadian dollars to pay for your imports and Mexican peso.
00:12:54 John Min
Well, if they go to a financial institution and they see that their markup is really high, then they’re going to be looking around to see which financial institution is going to provide more competitive pricing. And usually, the bigger banks will initially give corporates a very attractive markup to bring the winner of the business.
00:13:18 John Min
And of course, that implies that you’re going to lose your deposit if you’re a smaller financial institution as well. And then after that you never know what the markup is going to be.
00:13:29 Carmen Murphy
Interesting. Okay, okay, so talk to us a little bit. Like I said, you know, we get questions here at Wespay from a lot of our member financial institutions. And I go out and I teach our classes in person. And when I talk about FX transactions or international payments, most people get that deer in the headlights look and they are like, “we don’t offer that, that’s something we just don’t have the space for.” So how do we change their minds? How can FIs participate in a way that helps them earn revenue and that doesn’t expose them to as much risk as I think they’re afraid of?
00:14:23 John Min
So this has been an emerging trend in my opinion. The FIs and FinTechs, they used to fight/ compete in the market but we’re beginning to see more partnerships.
00:14:35 Carmen Murphy
Okay.
00:14:36 John Min
So if you’re an FI or a smaller bank and you know your community really well, you provide good credit, and you have a long nurturing relationship, you’d hate to lose that relationship because you don’t provide the FX payments.
00:14:49 Carmen Murphy
Absolutely.
00:14:49 John Min
Because they may walk down to bigger national banks like Wells Fargo, JP Morgan and then there goes your deposit. Right?
00:14:57 Carmen Murphy
Yep.
00:14:58 John Min
But with partnerships nowadays is so easy with API, you just plug it in. Now you, you have the world class international department for your bank and we handle everything for you. All you got to do is just funnel the transaction to us through an API. We do everything in full compliance, and better service, well I shouldn’t say better service, I don’t want to market Monex like that…
00:15:25 John Min
But money shows up next day. By the way, our system has, I call it the domino pizza tracker. It lets you know exactly where your payment is. (motions a horizontal line)
00:15:37 Carmen Murphy
Okay. So can the financial institution see that, or can the end user see that?
00:15:44 John Min
We can do both. We have a big bank in the Midwest, they simply white labeled our platform. So here’s the name of the bank, colored logo, powered by Monex. And they offer it to their corporate and retail clients as well. Now here’s the beauty of it all—in the US, the average markup for $100,000 transfer is about 2 to 3%.
00:16:07 John Min
Our rates are extremely competitive, because unlike our big banks we’re competing against, we have less regulation to comply with the capital reserve requirements and things like that. So our cost of doing business is like 1/10th. So we can pass on that savings as a lower markup, which gives FIs the opportunity to add their markup and still come in below the market rate.
00:16:34 John Min
And then we have different revenue sharing arrangements. And what’s really nice about this type of revenue is these are payments—by definition they tend to be regular recurring. And it’s not like you’re making a few dollars on a wire fee. Let’s say that your cost is $10, you mark up to $35 on international wire fees.
00:16:56 Carmen Murphy
Right.
00:16:56 John Min
If you’re doing a hundred thousand dollars worth of dollars to pound and your share is 1%, our share is half a percent or whatever we agree to, you’re making a thousand dollars every time they do transactions.
00:17:09 Carmen Murphy
Yeah.
00:17:11 John Min
And some of these small to mid-sized importers, especially the wine importers, they import so much wine, every container is anywhere from $40,000 to $75,000 worth of notional transaction. And you’re making $300 to $400 every time they do the transaction. And what’s the nice thing is that nowadays all our processes are straight through. So if they do it online, this is a straight through process. And you just made yourself $500 to $750 every time that wine importer in your community imports wine from Mexico, from Italy, France, South Africa, New Zealand. But at the same time, that wine importer is very happy because they’re getting better service and effectively less markup or cheaper exchange rates.
00:18:07 Carmen Murphy
You’re right. I think that you make a really good point just from the simplicity of, you know, these are businesses who are doing regular transactions. When I used to work at a local credit union and we had one of our members was a wig maker and every month he would send a wire, an international wire to China to buy the products to make his wigs, and I mean, it was like clockwork because that was a normal inventory for him. So that’s an excellent point to think about that from the perspective of you’re making this percentages and you can start to rely on it just like you can, the business is relying on the stream.
00:18:50 John Min
This is a recurring revenue. And we’re seeing a new emergence in the market. A lot of American companies are outsourcing their IT work, accounting work to the Philippines and India. And these are like payroll. Twice a month, they have to make these payments. You can just book it on your expected forecast in terms of the revenue. It’s very consistent, and as long as you don’t get greedy—and we advise you on that—so if the markup is fair, your customer is going to be pleased. You have secured deposit from that customer, and now you’re making recurring revenue every time they do the transaction. So to me, it’s win, win, win. The only party that loses out are the big banks.
00:19:40 Carmen Murphy
Right. Because they’re not getting…
00:19:42 John Min
Oh my God. I was listening to their quarterly earnings now record profits by these banks.
00:19:48 Carmen Murphy
Yeah, yeah. Nobody’s worried about them making money. No.
00:19:53 John Min
They won’t even know they’re losing this.
00:19:55 Carmen Murphy
Yeah, totally. So we talk a lot here at Wespay about ISO. ISO 20022. It seems like the, the hot topic. And I think it’s because, you know, FedNow came out a couple years ago, we’ve got RTPs using it and so everybody’s all abuzz.
00:20:15 John Min
And Swift is going to be using it.
00:20:18 Carmen Murphy
Yes. This year. Correct.
00:20:19 John Min
This year. March, next month.
00:20:22 Carmen Murphy
Yes. So how does that impact or affect these types of payments? Do our financial institutions or do your customers need to worry about it?
00:20:31 John Min
No, not at all. In fact, we’re looking forward to it because it’s just kind of standard in messaging. So it mitigates the chance of any miscommunication, misapplication, lost wires. Because it’d be a standard format and because everything is a standard format and all the financial partners are going towards the common language, you don’t need to translate. That’s. That’s the best way I can describe it.
00:21:03 Carmen Murphy
And it really is, honestly, I think that’s the best way to describe it. That’s how I always describe it too.
00:21:08 John Min
Yeah, exactly. Now if that’s the case, that we could do a lot of state straight through processing so from API straight through. So the wires will get faster, it will be more transparent, and the compliance will love it because ISO will enrich the data. You can put more information about a wire and why it’s going out, who the beneficiary, who’s the sender, especially when it goes to overseas in terms of AML, KYC, everything else would be more robust. So it’s like universal language for financial institutions.
00:21:47 Carmen Murphy
Yeah, I remember, I mean this is back several, several years ago. I used to be in the wire department at my credit union, and I mean I remember sitting there receiving international wires and trying to figure out where something was supposed to go as far as the details and who really is the sender here, and you’re trying to translate it and I, I’m no expert translator. Right. And so you’re right about ISO 20022 being so beneficial for something like this.
00:22:22 John Min
It is. Especially we deal. Yeah. We deal with 140 different currencies.
00:22:27 Carmen Murphy
Yes.
00:22:27 John Min
At this moment we got different formats for different wire instructions and it’s almost like looking up a dictionary what the right format is and where information needs to go. But if it gets standardized, then we can be more efficient, more transparent, and provide faster service at a lower cost. So we’re very excited about it.
00:22:48 Carmen Murphy
Yeah, I bet that’s, that’s awesome.
00:22:52 John Min
It is going to foster more partnerships between FIs and FinTechs because we’re all speaking the same language and it would be much easier to integrate services.
00:23:06 Carmen Murphy
Totally, totally. Yeah. And it’s, I mean it is a positive thing. I think it gets a bad rap, change is hard for people. Oh yeah, it’s. It really will be monumental.
00:23:18 John Min
It’s like learning a new language.
00:23:20 Carmen Murphy
Once you’re good, once you’ve learned it, you’re, you’re in the clear.
00:23:23 John Min
I was liberating at that point.
00:23:25 Carmen Murphy
But yep.
00:23:26 John Min
Yeah, I think the ramp up period.
00:23:28 Carmen Murphy
Good way to put it for sure. So what else do you want to share with our audience about these foreign payments? I feel like I could pick your brain all day!
00:23:39 John Min
I think you’d be amazed how prevalent these foreign payments are. And I would argue that if you’re a smaller financial institution and you don’t see that many international payments, then I would say you cannot see what you don’t see. Yeah, they’re going to bigger banks to get that service, that’s one. The second thing is a lot of our clients say “I don’t want to deal with foreign exchange, foreign is just too foreign to me.”
00:24:07 Carmen Murphy
Right.
00:24:08 John Min
I’m going to send dollars.
00:24:10 Carmen Murphy
Yes.
00:24:11 John Min
And let them worry about that.
00:24:12 Carmen Murphy
Yes.
00:24:13 John Min
But as a nerdy economist, I can show you a chart. I should have brought it up. The dollar has been strengthening for the past four or five years and that’s number one, issued IMF last annual meeting dollars. Very, very strong. You know what that implies? If you’re sending dollars, you’re actually overpaying for your imports and the services because they’re not going to complain that you overpaid them.
00:24:40 Carmen Murphy
No, no, no.
00:24:42 John Min
But eight, nine years ago, when the dollar was very weak, we used to get a lot of importers, they get re-billed from their overseas suppliers and it says your dollar has weakened. You need to make up for this difference because of exchange rates. But now we don’t get any rebates. I haven’t heard any rebates. It’s almost like when you go to 7/11, it’s so convenient to get that gallon of milk at night, but you know you’re overpaying for the gallon of milk. It’s the same concept. I tell my undergraduate students that there’s no free lunch in economics. So there’s a cost to convenience of simply just sending dollars and saying, “I don’t want to deal with it.” Well, that cost can be very significant.
00:25:31 Carmen Murphy
You’re right. You’re right. And that’s an excellent point because I forgot about that. But I remember that when I was working in these payments at my credit union, because we had the option to send it in the foreign currency or in US dollars. There were so many times that I remember our frontline staff or our customers saying, just send it in USD, it’s just easier.
00:25:55 John Min
It’s so much easier.
00:25:56 Carmen Murphy
I know I want to give them 100 bucks, just whatever that ends up being on the other side.
00:26:00 John Min
But you’re right, you just pay $110.
00:26:02 Carmen Murphy
Yes. It’s like you forget that that’s the benefit of doing these foreign exchange payments.
00:26:10 John Min
And then the US economy has $28 trillion in assets, $3 trillion are imports. So if you have 10 businesses in your community, statistically one or two are actively involved in imports, or some sort of international business. Another emerging market we’re seeing is all these e-commerce businesses, they’re exporting.
00:26:32 Carmen Murphy
Yes.
00:26:34 John Min
And they collect money in Canada and Canadian dollars, a Mexican peso in Mexico, Euro in Europe, and these companies have to bring the money back home. And that also requires foreign exchange. So this can now go both ways, import and export.
00:26:51 Carmen Murphy
Interesting. My brain is just like spinning thinking of possibilities…
00:26:59 John Min
Well let me spin a little faster for you because we have, by the way, if you want to start utilizing our services as business, it’s like account opening—from a banking world that’s very painful for businesses or even the individuals.
00:27:13 Carmen Murphy
Yeah.
00:27:14 John Min
Our SLA is 24 hours, and we can do it in as few as four hours.
00:27:20 Carmen Murphy
Oh my goodness.
00:27:21 John Min
I mean we still do the KYC.
00:27:24 Carmen Murphy
Yeah.
00:27:25 John Min
But the main reason is because we are not interested in extending credit to you. And we’re not a deposit holding institution. We’re transactional in many respects. So all your deposit, your credit arrangement stays with your local FI that you trust, you’ve been with many years.
00:27:46 Carmen Murphy
Yes.
00:27:47 John Min
It’s just the FX that you would be outsourcing.
00:27:51 Carmen Murphy
Yes. Okay. Okay, that’s a good point. Okay, what else, anything else do you want to share before we close out?
00:27:58 John Min
I was going to bring this up since your head is spinning.
00:28:01 Carmen Murphy
Uh huh.
00:28:02 John Min
We also offer virtual currency accounts.
00:28:09 Carmen Murphy
Okay.
00:28:09 John Min
So instead of you as a businessperson going around the world opening up bank accounts so you can collect funds locally, when you open with us, within 24 hours you can receive funds in 34 different currencies under your wallet. Oh, and we can give you unique IBAN for each single one—so you can give that to Amazon, Shopify, and say “this is my foreign bank account,” and now you can sell your product through your website around the world and you can collect the funds in local currencies. That makes it easier for customers overseas, because they see your product on the website and see “oh, it’s in euros!” so they make a euro transfer. But if you say pay me in dollars, you may not get the transaction.
00:28:57 John Min
And it’s a local account from their perspective. So you then you collect the euros, or whatever currency is relevant for the products you sell overseas. So it’s enabling a lot of smaller businesses to go overseas through their website or electronic e-commerce platforms. And that’s really booming right now.
00:29:17 Carmen Murphy
Wow, that’s cool. That technology is really cool. That’s helpful.
00:29:21 John Min
It is super cool.
00:29:22 Carmen Murphy
Yeah, I love that. Well, thanks John for joining us today. You talked a lot about Monex. If any of our listeners are interested in learning more, we will put Monex’s contact information in the podcast description. So please find their information there. You can click on it. You can always contact Wespay and we’ll get you their information as well.
00:29:48 Carmen Murphy
Thank you. A special thank you to our listeners. We appreciate you listening as always. If you are interested in becoming a member of Wespay and you’re not currently one, please visit our membership page which is also in the podcast description, the link to the membership page and don’t forget to subscribe to the Payments Perspective podcast anywhere podcasts are available.
00:30:13 Carmen Murphy
Please, please join us next time as we continue to work together in shaping the future of payments. Thanks again John.
00:30:20 John Min
Thank you.
