Over time the Fintech wave reaches ever more complex topics. FX per se was one of the earlier low-hanging fruits to be digitised – a simple, near immediate transaction that everyone understands as they do it all the time when going on holidays. However its taken much longer – a decade or perhaps two – for Fintech to touch the more challenging topic of hedging. Hedging is far more challenging as it is one that even FX professionals find challenging to decide upon/recommend. I think this angle is best summed up by the adage “one mans adage is another mans position” – history is replete with examples where so-called hedges turned into actual positions in all sorts of markets.
It is into this challenging area that serial entrepreneur Seth Phillips is taking Bound “a digital FX broker built for the 21st century” who are looking at ways to make FX hedging available in much lower ticket sizes than MegaBanks find it profitable to deal.
As we discuss in this show it is not just the classic case of an SME who have expenses in one currency and revenues in another – with both being uncertain – that is affected by this. Many startups might have for example dollar funding of capital but operate say in the UK in sterling. FX is very volatile these days and swings of 10% or so can easily flip a company from profit into loss. But traditionally many SMEs faced with the complexity of hedging and inaccessibility of hedging products end up taking this unwanted and hedgable risk. In a world where there are plenty of business risks that they are voluntarily running adding an additional unwanted risk is not ideal.
Topics discussed include:
- Seth’s growing up in a Mormon world and his fascinating personal journey therefrom including some years in Helsinki
- a quick summary of how Mormonism relates to mainstream Christianity [HT to YouTube channel HeavyDSparks]
- my journey from school days religious aversion to a realisation that apart from the “is this logically true?” angle to religion which I took when at school to the “what is the effect of this belief set – true or false on society?”
- identity in the modern world – if one moves from the traditional identities of one’s grandparents – religion, nation etc – then society lacks a central totem/mast and can fragment (from the Latin religio “to bind”)
- how “choose all of your beliefs and have what identity you want” is very tiring compared to ones grandparents days; formal identities leading to challenges for those who never fitted in – but is there – eg and esp now – any societal structure that does not have dissidents/folks for whom it is an uncomfortably tight shoe
- Seth’s career as a serial entrepreneur starting even from during his college days and through into Fintech
- Bound’s origin story putting three things together – personal and family professional pain re FX risk as well as having backgrounds in this area and seeing what could be done
- FX risk not existing centuries back when silver currency worked everywhere followed by the gold era
- from late 70s BigCos started needing to hedge and being served by Big Banks
- the market gap though this led to for smaller and medium sized companies who were not profitable for BigBanks to serve
- two sides of the coin – forward FX risk and on the other side the desire of a business to focus on it’s relevant business risks and not to experience incidental/tangential risks
- lack of expertise in SMEs around hedging as another barrier to entry even once the size of trades is smaller and accessible via digital technology
- the education component around the pros and cons of options, futures, and forward markets as the “hedge”
- the challenges of hedging uncertain amounts and thereby ending up incurring FX risk
- the most common practice is not to hedge and the most common risk to over-hedge (leading to a FX risk)
- Fintechs are often exposed eg in Fintech SAAS fee stream in overseas currencies or capital denominated in another currency
- the challenge of which day to choose to hedge? This can swamp the impact of choosing the best price on any given day
- how do Bound handle the educational piece of hedging – especially given the FCA regulatory constraints?
- what the Bound.co offering/interface is
- shoutout for talent Bound are looking at in terms of getting even bigger and better
And much much more 🙂
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