How peer-to-peer forex could break the cartel

published 10 November 2011

The best businesses can sum up their proposition in one sentence. Take this example: "By effectively cutting out the middleman, MoneySwap is able to remove the spreads and margins traditionally charged on foreign exchange transactions, as a result, overall transaction costs are significantly reduced."

I like the sound of that. My disgust at the high street foreign exchange racket inspired Penny Sleuth columns in the past. These transactions are one of the biggest rip-offs perpetrated by the financial services industry and that's saying something. Why my bank, with its worldwide branch network, thinks it should charge me 3% for my own money is beyond me.

Now, this institutionalised racket is finally coming under attack. One early mover is CurrencyFair. I have never used it and would check it out carefully before doing so, but its website claims to "match people who want to sell pounds, euros, dollars or whatever with people who want to buy them... at rates only otherwise available to multinationals and market professionals dealing in millions. No banks involved. No middlemen in pinstripes." It claims to have saved its customers over €1m on transactions that have amounted to €35m.

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Fat forex profits have attracted new entrants

Many don't have bank accounts and so are left to the tender mercies of operators such as Western Union. It's a disgrace that workers, often poorly paid, are relieved of a decent slice of their pay when they transfer cash to their families.

But Western Union's fat profits are attracting new entrants. MoneySwap (AIM: SWAP) is one of these.

MoneySwap is a recent entrant to AIM. It has a share price of 1.88p, and a stock market value of £7.5m. With revenue in its last financial year of just $512,000, the business is in its infancy. But as well as the ability to describe its business proposition in one simple sentence, it has two other attributes of a promising penny share: it has a large potential market and a service that could be adopted quickly.

Peer to peer trading is the key to the MoneySwap proposition. Instead of transacting with a middleman, you swap your currency directly with somebody who wants to make the swap in the opposite direction.

This cuts out the middleman and allows participants to negotiate a deal they're happy with, rather than just accepting the rate imposed by the intermediary.

How MoneySwap makes it easy for consumers

MoneySwap boasts 2,900 individual clients and 68 corporate customers, including the large casinos at Malaysia's Genting and those in Macau. It is targeting gaming, tourism and import-export businesses, as well as all those remittances from foreign workers. This is a very big market. Assuming that the system functions properly, one can imagine these workers adopting it quickly.

MoneySwap also offers a pre-paid card. This means that money transferred from, say, the UAE to Singapore could be loaded onto a card that would then be able to withdraw cash from ATMs. In a neat twist that might appeal to foreign workers concerned by their partners' spending habits, a limit can be set upon the amount of money that can be withdrawn.

MoneySwap has an experienced board that includes Richard Poulden, who is deputy chairman of Sirius Minerals. It looks like an interesting stock market newcomer. I will be watching it closely.

This article is taken from Tom Bulford's free twice-weekly small-cap investment email The Penny Sleuth.

Information in Penny Sleuth is for general information only and is not intended to be relied upon by individual readers in making (or not making) specific investment decisions. Penny Sleuth is an unregulated product published by MoneyWeek Ltd.

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Tom worked as a fund manager in the City of London and in Hong Kong for over 20 years. As a director with Schroder Investment Management International he was responsible for £2 billion of foreign clients' money, and launched what became Argentina's largest mutual fund. Now working from his home in Oxfordshire, Tom Bulford helps private investors with his premium tipping newsletter, Red Hot Biotech Alert.