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* Online money transfer firms undercut banks' high fees
* Banks' selling point, security, undermined by scandals
* Banks eye, sometimes buy, rivals; keep markups for now
By Patrick Graham
LONDON, Nov 16 (Reuters) - Working out of a shared officenear London's Euston station, Michael Kent is part of arevolution that may be driven on by this year's row over allegedcurrency market manipulation by major banks.
Kent's online business, Azimo, and more than 30 others inthe United Kingdom are building on the success of firms likeWestern Union and MoneyGram International incarving out a chunk of the market in international moneytransfers, travel money and card payments.
Their pitch is simple: in the era of electronic money, the4-12 percent fees banks charge consumers for any transactioninvolving foreign currency is ludicrously expensive.
Today, to transfer 100 pounds to Germany, British highstreet bank Halifax would charge 9.5 pounds and use a rate 3.06eurocents per pound worse than those the financial world'sbiggest players charge each other, totalling around 12 percent.
Halifax points to the costs of running secure, wide-rangingoperations and says the percentage falls for larger amounts.
Currency market majors HSBC and Barclays charge less andcosts on foreign currency transactions on credit cards often gobelow 5 percent, but the fee at Azimo is 1 pound, the spreadless than 1 cent, and the overall cost less than 2 percent.
"This is money that the banks do not need to charge peopleand we just set out to change that," says Kent. "We are in themiddle of a worldwide downturn and these people are makingsupernormal profits. It is money people do not need to pay."
REPLAY
Azimo's original raison d'etre was to reduce the cost for migrant workers of sending money home by streamlining the sortof service Western Union or Moneygram International were alreadyproviding at cheaper rates than western banks.
Across London, in trendy e-business hub Shoreditch, marketveterans Brian Jamieson and Daniel Butcher are seeking to takethe game one stage further with another start-up, Centtrip.
As financial markets went electronic in the 1990s, they wereamong entrepreneurs making the most of the large spreads bankscharged companies for day-to-day currency purchases.
Such firms helped drive corporate costs over interbank ratesdown from several cents to a few pips, or hundredths of a cent.Centtrip is now seeking to do the same for ordinary consumers.
Customers sign up online, get sent a Mastercard and pay intoit at a cost of 0.5 percent. They can then use the card for 14currencies, with a spread of just 4 hundredths of a eurocent tointerbank rates, compared to Halifax's 3 whole eurocents.
Centtrip's initial target is business travellers, butJamieson says it could take just five years for a mass audienceof smart-phone users to clock on to the model.
One key ingredient, he says, is convincing households theirmoney is as safe with small web-based firms as with their bank.
"After what happened in 2008, we've got to the point wherewe have lost trust and faith in the banks," he says. "That hasopened up the door for people like us to disrupt the market."
Since the global financial crisis laid bare excessiverisk-taking at banks, their reputation has suffered further fromallegations traders fleeced their biggest clients bymanipulating foreign exchange rates, though there is nosuggestion of any manipulation of retail rates.
UNDER THE RADAR
Banks do not break out their retail forex business in theirresults and there are no overall figures for the sector, butofficial data shows Britons spent $23.6 billion while onbusiness and holiday trips abroad last year.
Numbers from the Bank of International Settlements showglobal flows worth $78 billion a day through retail foreignexchange brokers, and $188 billion a day in flows from companiesoutside the financial sector, although much of that is from bigmultinationals going through their banks.
"If travel money is billions then the market in theseordinary bank transfers will be at least 100 times that," saysIan Strafford-Taylor, chief executive of one of the earliestplayers in the consumer space, FairFX.
FairFX is worth just under 40 million pounds according toits listing on London's AIM market, and made almost 3 millionpounds on revenues of more than 300 million last year.
The relative size of the newcomers shows there is some wayto go. Eesha Mohindra, analyst at consumer finance websiteMoneysavingexpert.com, said more transparency was needed."Without knowing it, most people waste big money when spendingcash abroad by using the wrong card," she said.
A handful of senior bank managers who spoke to Reuters oncondition of anonymity said the challenge to them in the retailsegment was under serious consideration for the first time, butit was not yet considered big enough to force widespread changein a market seen as more lucrative even than the United States.
"Clearly some of the banks still see this as a captiveclient base and it is coming closer to that point where thesesort of nimble startups will force us to change," said the headof electronic trading with one large European bank.
"Banks are already investing in some of these companies.Then when they see that they are really succeeding, they willbuy some of them out." (Editing by Philippa Fletcher)
