At one time, White Labelling was the default option for a new broker entering the FX market. The appeal is obvious, with White Labelling helping to provide both quick and easy access to a brokerage unit, while also allowing new brokers to focus on client acquisition. And yet the problem with this traditional model is two-fold, argues Mark Chesterman, Chief Operating Officer, IG Institutional. “Firstly, the broker is building a brand based on someone else’s technology,” he explains. “They have no control over that technology, no control over new features or developments - and they are helping their clients learn to trade on a larger broker’s (often proprietary) platform.” Secondly, the White Label solution makes it very difficult for a broker to switch service providers, Chesterman warns. As a result, moving clients from one White Label to another can be time-consuming, difficult to manage and, under the traditional White Label model, liable to significant client attrition.
Richard Elston, Head of Institutional, CMC Markets, agrees, adding that although the traditional White Label model may have been an ‘out-of-the-box’ solution, it could also prove incredibly burdensome in terms of end-user administration. “All too often, counterparties would have to communicate with the White Label provider in order to undertake even the most mundane account management functions,” he explains. “This inability to ‘self-serve’ basic administration functions meant that legacy solutions were expensive and difficult to scale.” And yet in today’s market, counterparties can benefit from having an array of account management tools at their disposal, Elston says. “From a more fundamental perspective, we want to ensure that counterparties have a truly agnostic product to offer,” he adds. “If there’s one aspect that defines how FX White Labelling is evolving right now, it’s about empowerment of the counterparty.”
Alongside the increasing sophistication of partner requirements, additional pressures such as higher customer expectations, increasing competition and ongoing economic and regulatory threats are also prompting brokers to reassess their business models. “The days of ‘plug and play’ solutions are over,” adds Neil Browning, Executive Director, Saxo Bank. “Clients are now looking to work with providers whose service range supports a closer level of partnership and integration.” As a result, providers of White Labelled services are beginning to tailor their solutions according to the different requirements of their partners, Browning explains. “Hence the development of different types of White Label partnerships,” he says. “Even the largest sell-side firms are showing greater openness to deploying third party capabilities - and therefore providers are having to adapt their models to reflect the differing models of their partners.”
In addition, platform providers may decide to offer their solution as a grey label to brokers who want to avoid the setup costs associated with White Labelling, according to Michael Karczewski, Head of Business Operations, Match-Trade Technologies. “But the reason they do so is because they believe this grey label will, one day, become a White Label,” he adds. And yet the White Label model remains ideal for small- and medium-sized brokers, because they are then able to benefit from technology providers’ proven solutions and experience, he argues. “Demand for FX White Labelling will continue to mount,” Karczewski adds. “Developing solutions from scratch is becoming expensive and requires adequate IT resources. So for most brokers, it is far more effective to outsource all technical aspects of their brokerage business to external companies, which in turn enables them to focus on their sales and marketing efforts instead.”
However, most leading brokers do not license their solutions to third-party brokers, Karczewski claims. “Even if they do, their solutions are customised mostly to individual brokers’ needs,” he adds. Ultimately, technology providers understand this and that the most important factor which brokers look for in a solution is flexibility, Karczewski explains.
Yet according to Jacques Sale, Institutional Relationship Manager, Dukascopy Bank, it does tend to be experience that wins out in the end. “Entrusting your business to a company that purely provides technology can sometimes be counterproductive,” he warns. “In this space, you also need support from those who have some experience and familiarity with market dynamics and possible future scenarios.” As a result, he urges brokers to instead look for a solid and reliable partner that has been in the industry for several years. “They can then help the broker avoid unpleasant situations, as well as providing marketing support, risk management and other backing - something that an IT provider may not be able to do,” Sale adds.
Standing out from the crowd
Chesterman agrees, adding that outsourcing different requirements to specialists in their field allows brokers to define their offering much more clearly. Also, because there are a large number of platform providers in the market, brokers are now able to offer more than just the ubiquitous MT4 platform with ease. “Most platform providers will support the back-office requirements too, and the major bridges will connect these platforms to the liquidity providers, not to mention the plethora of reporting solutions available for both client and regulatory reporting,” adds Chesterman. “This means that the broker is never tied to a White Label provider who may well be a competitor, can move service providers much more easily if they need to and is able to have much more control as they create a USP for their target audience.”
Furthermore, larger brokers tend to have their own proprietary platform on which they spend significant sums. And as these are being developed for the brokers’ own clients, they are incentivised to ensure stability across the ecosystem. Yet according to Chesterman, if a broker is integrating many different service providers, this then creates potential areas of instability. He adds: “In addition, there is a cost associated with maintaining the integration of a number of different service providers, whereas a White Label is a lower cost model.” However, one of the key advantages brokers require from a White Label provider is readiness and the technical ability to share custom settings and income generation sources with the White Label client, argues Sale.
“At the beginning of a new White Label partnership, the new client is focused on simply launching the service and may have only limited understanding of how the project will evolve, or what the performance indicators should be,” Sale explains. “However, as the client gains in experience and understanding, then the White Label partner will naturally start looking for more opportunities to exploit the business activity his client base is generating - and this is when they start searching for more customised options.”
Also, brokers will naturally be keen to differentiate their White Label from others in the market. Trader’s will tend to know very quickly if a platform’s technology is backed by a particular White Label provider, Elston explains. “At CMC Markets we take a modular approach, meaning we can make each platform look that much more bespoke,” he adds. “For example, we can tailor it to show the specific asset classes required for the relevant geography they are operating in. That is the differentiation we can offer, rather than a ‘one-size-fits-all’ solution.”
Leading the way
Even so, competition in the White Labelling market is very tough, warns Karczewski. “So as a technology provider, you have to be a one-stop shop where your client can find all the solutions they need,” he explains. “Therefore, the portfolios of most White Label providers look very similar.” Yet Match-Trade believes that brokers do not really need another 10 new indicators in their platform when there are already 40, for example, as this won’t differentiate them from other brokers. Instead, Karczewski believes that technology providers should be able to predict trends and keep up with innovations such as the growth of binary options, or more currently the growth in cryptocurrencies or social/signal trading. “Being first on the market with an innovative solution is the best way to differentiate your client from other White Labels,” he adds.
Advances in consumer industries have also created an expectation among end-customers for real-time responsiveness, customised functionality and a seamless interchange between devices, platforms and channels. Browning explains: “Our White Label Partners are telling us that the ability to deliver a differentiated user experience is a major competitive differentiator. In order to support this ever-increasing requirement, White Label providers must ensure their platforms are based on OpenAPI technology, just like SaxoTraderGO.” He adds: “In fact we believe that over time, API based communication and data exchange will be a prerequisite in the finance sector.”
Open API and HTML 5 - the environment in which CMC Market’s out-of-the box White Label model operates – also provides tremendous flexibility, according to Elston. “It makes individual modules available for potential deployment into third-party environments,” he explains. “We see it as an important part of growth going forward into next year.” Furthermore, the demand for enhanced functionality and features has also led CMC Markets to offer a number of more sophisticated solutions beyond its traditional White Label trading environment, such as its TradeSplitter tool. This is adapted for specific business lines, such as discretionary managed accounts, and allows the client to choose how a single block order is allocated across defined customer accounts, Elston explains. CMC Markets also provides a flexible account structure, which allows brokers to operate different business streams independently.
“And on the basis that the new world of MiFID II means accurate and timely trade reporting is more important than ever before, we offer elements such as delegated EMIR reporting,” Elston adds. “This makes the reporting obligations of each broker than much simpler, with data files produced in a generic format that can be pushed straight into the necessary back office systems.” In addition, the US has also introduced a regulatory mandate that requires platforms to provide detailed trade reports to customers and brokers. “Based on these needs, we have changed the reports and account settings in line with the partner’s directives,” Sale says. “Having direct development access and being able to intervene immediately to change the product as needed is a key strength of Dukascopy Bank.”
Over the past few years, banks have also continued to face challenges in terms of capital allocation and expenditure, meaning their preference for proprietary resources and solutions is no longer viable. As a result, banks are using industry utilities and third party resources as a much more integral part of their business models, Browning observes. White Label providers are having to respond to this need by providing outsourced solutions in non-traditional areas, such as reporting and portfolio management. “For White Label providers like Saxo, which already has its own offering in each of these areas, there is a real opportunity to fulfil this increasing need,” says Browning. “Providing the front office and trade execution capabilities has also led to the servicing of middle- and back-office needs, such as enhanced risk management, reporting capabilities, settlement or the safekeeping of securities. This is a trend which we expect will continue.”
Browning also attributes much of Saxo’s success in White Labelling to its investment in trading technology. For example, SaxoTraderGO – a trading platform-based on REST-based OpenAPI - has been rapidly adopted by over 100 WLPs, who are now offering it to their end-customers. The use of OpenAPI also allows clients to build tailor-made apps on Saxo’s infrastructure and to integrate into their own applications and systems. “At Saxo, we believe that partners have a third option - to work with a leading broker which also has a proven track record of technological innovation,” Browning explains. “Testament to this model is the growth of our White Labelled business. In the last year, there has been near a 10% increase in the number of White Label Partners to over 120, which includes some 10 cross-border banks.”
Widening the market
Even so, at the moment FX White Labelling is still mainly addressed to retail brokers, argues Karczewski. However, Match-Trade Technologies has widened its potential White Label market base by offering its White Label model to brokers who are also interested in becoming liquidity providers. “The Match-Trader System, based on our robust matching engine, is a solution very similar to those used by biggest liquidity providers in the forex industry - and is much more professional than providing liquidity through a coverage account on MT4 or MT5,” he explains. “Additionally, we are currently adjusting our matching engine to be able to work as cryptocurrency exchange with a White Labelling feature.”
Because APIs are also so well serviced now by a number of different parties, there is very little complexity in integration, Chesterman adds. As a result, this removes one of the traditional hurdles to a liquidity provider model because the broker needs very little technical expertise, so can focus on their core competencies instead. “The growth of API capability also supports more complex, bespoke product offerings that enable differentiation,” Chesterman says. “It’s important not to underestimate the flexibility a more modern, multi-service provider model delivers.” For example, under the traditional White Label model, if your provider cannot offer bitcoin, you also can’t offer bitcoin, he explains.
But in a multi-service provider model, it is much easier for a broker to source crypto-liquidity and plug it in to their platform. “Not being tied to a single service provider provides means a brokerage can be much more agile in responding to market trends,” Chesterman says. However, the risks that these tools can bring to the customer - and to the bank itself - must be considered, warns Sale. “We are talking about a product that does not exist legally, at least not in the vast majority of countries,” he adds. “So our customers will judge the success, or not, of cryptocurrencies over time - we can simply provide them with the ability to access these instruments and then let time decide.”
New markets, new opportunities
Saxo Bank’s clients are also keen to have exposure to crypto-assets as part of their portfolio, just as with other asset classes, adds Browning. However, most are only planning to proceed with this strategy once crypto-currencies are offered by regulated banks - and as crypto-currencies are not yet mainstream, this is not possible. “Trading bitcoin and other cryptocurrencies will be our first priority, although to begin with trading will likely be limited,” he adds. “However, it is anticipated that our offering will enable clients to achieve their main goal of exposure to cryptos by holding them in their ‘wallet’ and therefore enabling them to diversify their assets.”
A further area of potential growth is likely to come from Asia and Latin America, adds Browning, driven by White Label Partners in these regions needing to meet the increasing demands of their end clients, who have high expectations in customer service. “Also, partners in these regions are not constrained by the legacy and proprietary technology issues which many financial services organisations have faced in western developed economies,” he adds. Sale agrees in the growth potential seen in both regions, both in terms of economies and demographics. In addition, the Gulf countries have “always had an economic value and a remarkable potential” he adds, as well as an often-overlooked Continent: Africa. “Present-day, it is a market that presents many problems from different points of view, regulatory, political, and economic,” he adds. “But these countries have huge potential and, aside from South Africa, there are still new markets to be discovered.”
Karczewski adds that Asia is also the fastest growing market in FX industry, which means there is huge demand for FX White Label services. “This is why we decided to open new office of Match-Trade Technologies in Kuala Lumpur,” he explains. “We expect this move will help us further increase our share in the Asian market.” In all regions, a strong track record and operational support are very important factors in choosing a White Label, he adds, but in Asia strong relationships and trust are particularly vital. “If your client knows he can trust you, then he can focus on other important aspects of his business, such as sales and marketing,” Karczewski says.
Chesterman agrees, adding the one thing that both White Labelling and using a multi-service provider model have in common is that it is critical to ensure you are partnering with reliable counterparties - whether that’s for liquidity, platform, back office, or for a full White Label solution. “There has to be a mutual trust that all parties will perform to the highest standards to ensure as much business risk as possible is mitigated,” he warns. “Tight spreads are an important consideration, but not the only one.” Instead, the full cost of trading needs to be considered, from spreads to slippage to outages. “Reliability is critical to the success of a brokerage, so all partners in a supply chain need to play their part,” he adds.
For example, CMC Markets has been delivering White Label products to clients for the best part of twenty years, says Elston. “This successful legacy alone offers many counterparties the reassurance they need that CMC Markets is the partner for them,” he adds. “We’re not focused purely on FX either, but instead have always had a truly multi-asset proposition, whilst the strength of our balance sheet not only delivers confidence in the operation, but also ensures that we can tap into the deepest market liquidity.” And looking ahead into 2018, Elston expects that MiFID II compliance will be at the forefront of many partnership decisions. “But again, we are confident that as a business, our solutions will continue to adapt to meet the ongoing theme of evolution that prevails in our industry,” he adds.
Ultimately, White Label partners seem to be looking for broader and deeper partnerships than perhaps ever before. “This is because in many cases the need for White Label partnerships is a means of achieving a strategic shift, such as moving quickly into a new market segment, ensuring regulatory compliance or implementing a digital transformation strategy,” Browning concludes. “As a result of this trend, White Label providers need to be able to offer a sustainable, scalable service proposition with flexible infrastructure and multiple platforms.”