And the likes of OFX had to keep in step: “If we mess up, the whole model really falls down.”
He also singled out another, broader risk to his sector from the worldwide crackdown on AML: banks could start to step away from providing essential services to the forex companies.
Entering will be much harder than it used to be, and the cost of survival just goes up.
— Skander Malcolm, OFX CEO
“You look at what’s going on with AML fines, they’ve hit the roof. So banks are sitting there saying: ‘I’m going to bank a service business that’s by nature high risk and therefore I should audit it more, I should get satisfied by management, I should get satisfied by the controls, AUSTRAC should give these folks a clean bill of health; and if I can’t do all that, well, I’m not a utility, so I don’t have to bank them’,” he said.
“Because of the manic increase in AML fines, the banks are saying, ‘Some of the start-ups are tech disrupters, and if they don’t treat this stuff seriously then it’s our licence and our fine that gets done here’. So the banks are quietly off-boarding a lot of these companies.”
This could make it harder for new entrants to join the likes of OFX and TransferWise in the market, he said. “You don’t get a tick as you come in and the door gets slammed behind you. It’s every quarter, and they audit you. And so entering will be much harder than it used to be, and the cost of survival just goes up.”
But a hiatus on new entrants might be no bad thing for OFX, which is an established company, subject to the corporate governance and financial disciplines of a listed entity, in a world of edgy, private-funded start-ups.
“It’s pretty hard to compete with irrational competitors. There’s so much liquidity, these [venture capital] firms say they don’t care if the company doesn’t make any money for five years, and you sort of go ‘how do I compete in this situation?’,” Mr Malcolm said.
But he’s not sure he’d trade places with them. “Being a listed company brings disciplines, which I think is appropriate in our space … [compared with] nobody picking you up on the quality of your earnings,” he said.
“And the reality is that being owned by private equity, it brings other pressures. They’re not trying to build the culture. The biggest thing that they benefit from is lack of scrutiny, but I also think that’s going to be their undoing.”
Looking beyond AML to regulatory pressures more broadly, Mr Malcolm worried about the potential for regulatory arbitrage in his sector. The British regulator was letting payments companies operate like quasi-banks, and the Australian regulator – which required forex companies to move money off the balance sheet more regularly – was letting British-registered companies use their looser licence Down Under.
“They’re relying on their UK money licence and ASIC says you’re entitled to do it. That’s not the spirit of it, to my mind. It’s an unintended consequence: they wanted to create a licence that promotes large-scale payments, which is a good thing. What they didn’t see coming was, once you let people leave money in that account you are basically a debit account,” he said.
“The e-money licence in the UK is going to come under some pretty substantial scrutiny. If you look at their balance sheet they’ve got a lot of deposits. They’re technically not deposits, because they’re money held for transfer. But you can leave your money there … To me, that’s a bank.
“At some point that’s going to become a problem, because the central banks and the regulators are saying ‘if you want to take deposits, we want to safeguard those, that’s fundamental to the system’.
“But they’re not regulating them like a bank, they’re regulating them as a payments company, and it’s only going to take one of them to collapse – because they don’t make money – for people to go, ‘hang on, you guys were asleep’.”