According to the 2019 Triennial Survey by the Bank for International Settlements (BIS), trading in the FX markets totaled $6.6 trillion per day in April 2019, up from $5.1 trillion three years earlier. While traditional hubs such as the United Kingdom, the United States, Hong Kong, Singapore and Japan still facilitate the vast majority of all foreign exchange trading, many emerging markets are making substantial inroads. For example, mainland China has recently recorded a notable rise in trading activity, making it the 8th largest FX trading center (up from 13th in April 2016), according to the same 2019 survey.
This level of activity brings challenges as well as opportunities, and FX markets are more competitive than ever. New regions and players are catching up with developed markets by closing the technology gap, improving institutional capacity and accumulating physical and human capital. Consequently, the industry needs to change and adapt at an increasingly fast pace. Globalization has created a wider playing field for new entrants and opportunities abound.
Three trends in particular – technological breakthroughs like artificial intelligence (AI), the advent of the “subscription economy,” and the growth of the partnership model – are disproportionately affecting the FX markets.
Opportunities created by AI
In recent years, technological breakthroughs and innovation have created opportunities in the FX markets. Specifically, AI is having a significant impact on trading activity, deployment of investment capital and the use of technology. AI is not just a consumer trend; of all the technologies that drive digital transformation in the enterprise, AI is often touted as the most disruptive. It is rapidly changing the business environment, and the financial markets are no exception.
AI is helping humans to quickly make more informed decisions in the FX markets by analyzing huge amounts of data and information in a matter of seconds. As traders seek to make their workloads more efficient and increase profitability, there has been dramatic growth in AI-assisted voice trading, which can listen to calls, translate voice to data, interpret that data, and provide in-depth insight for traders.
The rise of the “subscription economy”
Until recently, businesses that desired to utilize advances in technology would often be required to spend meaningful capital. The cost/benefit of making such investments has impacted the adoption of AI and other innovative technologies in the financial industry.
However, a new opportunity for the markets is the extraordinary growth of the “subscription economy”. For those unfamiliar with the term, this refers to businesses offering their products and services on a subscription basis to customers rather than charging them a large upfront fee in the form of a license payment.
The subscription model is already popular in other sectors such as online streaming services and is transforming the way FX firms evaluate investing in new technologies and systems. Companies no longer have to necessarily weigh the high initial payment of purchasing a new system as a subscription structure allows for less commitment and lower upfront costs. Thus, it is now much easier for an FX trading firm to switch technology platforms and providers. The organizations providing these services or products must now be even more responsive to customer needs in order to retain long-term recurring revenue.
The growth of the partnership model
Another very effective way to meet and exceed customer expectations is leveraging third-party partnerships and collaborations. In today’s rapidly evolving FX landscape, the pool of clients is shrinking and competition is rife.
Usually, larger organizations have a foundation of loyal customers to maintain their market presence even in tough economic conditions. These ‘incumbents’ have advantages in size and their networks add a multiplier effect.
And yet, in spite of that, we often see big, traditional organizations lose out to smaller challenger start-ups who are more acutely aware of a gap in the market and pounce. These FinTech disrupters attack some of the most profitable elements of the FX value chain.
It may make sense, therefore, for an incumbent to consider a partnership with a challenger to provide a service or product that both of their customers demand. It also enables both firms to penetrate new markets, create more distribution channels, customize solutions for clients and establish an integrated platform.
Not only are there many advantages to partnering for organizations – such as increased customers and net outcome – the benefits of partnerships to customers are significantly greater. As quite often is the case, customers may be simultaneously paying for multiple products or services. Therefore, a partnership can mean synergies which will better serve customers and save them time and money.
In all respects, a firm’s ability to adapt to new trends is vital to its lasting growth. As the frenetic pace of change - which has been the hallmark of the FX industry - continues, the organizations that constantly innovate for customers, such as through AI, adapting to the subscription economy and leveraging the partnership model, will be the ones that successfully navigate the markets.