Comment: Why protection IFAs have nothing to fear from online competitors – yet

  • Thursday 14 April 2011

The non advised online sales process is more complex than you might think

This time last year, I was approached with what seemed an interesting work project. The idea was that I would write briefing notes for journalists, and suggest the best media for the principals of the firm to contact. Sort of public relations work but without the upfrontness of a PR person, I suppose.

The project itself involved CurrencyFair, a new company established for legal reasons in Dublin, whose online offering had the potential to be a category killer. It could destroy the banks’ very profitable retail foreign exchange business in much the same way as Amazon and had laid waste to high street music and book shops. Many of us regret the passing of favourite record retailers but no one sheds a tear at big banks bashing.

CurrencyFair’s brilliant idea was to cut out banks altogether, harnessing the internet for “peer to peer” transactions. At its simplest, foreign exchange is a two way business. I have sterling and want euros. You have euros and want sterling. Go to the banks and I’ll pay about 5% more for my euros than the headline rate and the other person will pay the same penalty for pounds. But if we could be brought together by the internet and swap – the online equivalent of meeting mid-Channel – we could both save the 5% otherwise scooped up by banks. All CurrencyFair takes is a small fixed fee.

The idea was hailed by The Guardian and many other national media which loved saving big money. The firm offered more than a dozen currencies.

But the scheme, which is still running, has so far failed to shake the banks. It does not work for tourists as users needed bank accounts in both currencies – there is no cash machine card. It can be complicated – a bit like bidding on an online auction site. Above all, it did not attract the critical mass needed for any internet driven concept to work. If I am a South African with rands buying a property in Switzerland for 2m Swiss francs, I need to know the system can absorb the transaction at a lower cost than alternatives. If I don’t have that confidence, I’m off to the banks (or, if I’m smarter to a specialist currency dealer).

What this goes to show is that online can only replace people if the transaction is easy, fulfils needs, and has critical mass. In general insurance, for instance, the most successful comparison sites major on motor, a market where the high street intermediary effectively gave up 25 years ago to the call centres. It’s low margin work and easy for consumers to use – the ideal online paradigm. Motor also has the advantage that, as a legal necessity, it is bought, not sold.

But car owners needing something special – the 20 year old with the Lamborghini or the driver returning after doing time for motoring crimes – still need the real person. Clicks won’t work for them – they need real bricks.

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