M&A Ideas for the Retail FX/CFD Industry
Given we are all at home with lots of time on our hands i figured i give you something non virus related to read about. In my 18 years as CEO at FXCM I bought 10+ retail FX companies or client bases (from dying ones) on 4 continents, 2 HFTs, and 2 institutional trading operations. I also sold 4 divisions of FXCM so have been on both sides of these things. FXCM also conducted due diligence on dozens of deals it never pulled the trigger on. Some of our deals were massively successful some were complete failures and every shade in between. As I look back at it now here are some things to keep in mind for those still engaged in this.
The ever-present dilemma in retail FX/CFD M/A is CHURN. You buy the customers you get a burst of revenue but in 6 months 90% of that revenue goes away this keeps many M/A deals from happening as it’s just not worth it. The ever-changing regulatory story in retail fx also makes buying another broker VERY risky. Given regulatory trajectory is still very negative most deals that made sense ten years ago just aren’t possible today. The trick for buyers is to buy capabilities geographic/language/tech/license that are otherwise too problematic in establishing on one’s own and help establish a new steady/ongoing stream of customers for the buyer. For some of the very lightly regulated firms maybe buying a competitor that has most of its customers coming from IBs or affiliates seem sustainable but few firms can pull that off from a compliance standpoint. The most important thing to stand in a way of buying another broker is that the most precious asset is the new stream of fresh clients that is coming through the door so to do that strategies on what to buy need to change. Some examples especially ones still relevant with our ever changing regulatory and macro environment.
1. A portal like dailyfx once owned by FXCM. Dailyfx.com had no revenues $6m a year in payroll expenses for analysts in multiple languages. I sold Dailyfx.com to IG markets for $40M (yes that’s USD). The IG team seemingly acquired no immediate revenue and took on extra expenses with no immediate benefit. There is also little correlation between serving customers increased content and getting them to trade more. AND YET Dailyfx had enormous traffic of exactly the type of highly engaged users any brokerage firm covets and most importantly organically attracted new users every month in large amounts. So as a tool of attracting organic leads and converting them to clients without spending AD money its brilliant. This has been a big success at IG Markets and similar gems await out there. This is a property that will be yielding accounts for IG Markets for many years to come and is one of the best returns on investments you can do in this space. There are multiple gems in our space, I know some of them better then others, but similar returns can be had in other deals. For those more skilled in online marketing there are ways to juice these deals even further, we tested some strategies at FXCM happy to share.
2. Buying a legit vanilla online Banking offering with simple debit cards and savings account capability. I know I mentioned this in the past post, I believe this is the most compelling differentiator out there for brokers to buy. Using past stats 70% of clients who churn from retail brokers come back, if they had parallel bank account with your broker, they will most likely return to you, most dormant or closed account campaigns never go anywhere. This is a way of monetizing the many leads you get anyways but can never convert to a retailfx client because fear of loss, lack of time, etc. Truer of emerging market clients but those are the majority of the industry.
3. Crypto Currency Custodian: Anyone who knows me, knows that I was a huge crypto skeptic have been from the beginning. That started to die away last year as market actually came back from its crash because of people fleeing unstable EM currencies. So unlike crypto loonies out there that think the USD is going away, I don’t, but many EM countries’ currencies are going the way of toilet paper post Covid19 and crypto has been a very good way to sneak money past capital controls. This means crypto usage will keep growing, and being a custodian will yield lots of customers especially from EM. Some of the larger retailfx brands have far bigger balance sheet and brand then most players in the crypto space and can make a sizable dent in the market. The synergies to a retailfx/cfd broker are same as the online bank example above. Most brokers would be shocked to know the amounts of crypto under custody at some of these players, amounts that could grow significantly under a more well-known global brand with a real balance sheet and decade or two in business. As a custodian monetizing further through lending and trading of the actual coins is something that is really worth considering.
Obviously the above is not a complete list I will do more later, but food for thought as we all have too much time sitting at home anyways.