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By Patrick Graham
LONDON, July 7 (Reuters) - From a small, white-washedbasement close to London's Liverpool Street station, SakthiAriaratnam is beating banks at what you would have thought wastheir own game - and it is relatively easy.
On a recent Tuesday morning in the heart of London's Cityfinancial district, Sakthi's firm Best FX would sell you 124euros for 100 British pounds. Less than 20 metres along thestreet, the world's third biggest trader of foreign currencies,Barclays, would only give you 118.
The difference is a familiar one: surveys show consumerstend to seek travel money from bureau de change booths inpreference to banks because the rates are better and Best(www.bestforeignexchange.com) are rated by a number of consumersurveys as offering the UK's best deal.
But at a time when banks are seeking to defend themselvesfrom charges they manipulated the $5 trillion a day currencymarket, the gap stands as a refutation of the lenders' claimsthat their foreign exchange market has become extremelyefficient for everyone.
The exchange rates on the board are not even the best onesSakthi and his colleagues give bigger or regular clients.
"If people from any one of the big firms we serve want abetter rate, we give it to them," he says. "There is enoughleeway there."
It is not an accident that four of Best's six Londonlocations are in the financial district. Ask around in some ofthe City's major currency dealing rooms and traders say they usethe company for money for business trips and holidays simplybecause they get more bang for their pound.
Sakthi lists clients from some of the world's biggest banks,U.S. giants JP Morgan and Citibank, or their UKcompetitors Barclays and HSBC. He also hasregular custom from workers at the brokers, IT and informationproviders whose businesses feed off the banks.
"This is predominantly a City area. It is not tourists,"Sakthi says. "You have to be extremely competitive on pricebecause they know the market. But if you give the best ratesthey will stay with you - and we have a lot of repeat custom."
MILLIONS
Senior management at banks are nervous about how theallegations of currency market manipulation, now beinginvestigated in half a dozen jurisdictions worldwide, will playout.
First, there is the potential for fines from regulators thattop the 6 billion euros ($8.18 billion) they have already paidout in the Libor interest rate fixing row.
But another reason is the possibility that theinvestigations will lead to a more detailed look at thestructure of a market from which banks rake in billionsannually. While most of those institutions have moaned loudlythis year about falling profits from foreign exchange, Barclaysfor example made 5.54 billion pounds from all trading last year.
HSBC, one of the few banks to break out its FX tradingprofits, made $3.2 billion in 2013, almost half its overallMarkets income of $6.9 billion.
At an institutional level, the currency market is highlycompetitive. The spreads at which banks buy and sell euros fortheir biggest clients - other banks or multi-billion dollarinvestment, hedge and pension funds - are just a "pips" orhundredths of a cent. Senior bank traders and managers regularlycomplain that increasingly it is business run at a loss, or atvery thin margins, in aid of keeping key customers.
But by the time they get down to delivering that service toordinary individuals, the cost rises. Barclays, for example, ischarging spreads of more than 7 cents - or more than 700 pips.
Parcelled up and back on the interbank market that amountsto 700,000 euros of profit for the bank on a standard 10 millionpound lot.
Banks say the difference reflects the broader costs theyhave to bear as crucial parts of the world's financial structureand the risks they have to bear and manage in such hugetransactions.
"Our analysis shows we are competitive against a range ofdifferent FX service providers," said a spokesman for another UKhigh street bank, Lloyds.
"Our FX international payments service has an extensive costbase and the margins charged on payments relate back to the costto providing the service, staff, premises, infrastructure andprocessing."
But speaking on condition of anonymity, officials at two ofBritain's biggest high street lenders said there are concerns ofa steady loss of market share in the retail segment.
"The truth is that the rates banks give to their customershave never been very fully examined," one senior retail bankingmanager told Reuters.
"They are benchmarked against what our immediate competitorsare charging, how much you want to earn or position yourself ina given segment and so on. But they are not necessarily setagainst all of the places you can now exchange currency online.We do seem to be losing share pretty consistently as a result."
DIFFERENT STROKES
After the surge of the Swiss franc drove rises in mortgagerepayments for millions of eastern Europeans up two or threetimes in 2009, Polish and Hungarian policymakers began to askwhy banks were allowed to stipulate that their own rates shouldbe used for the currency exchanges involved.
Poland's parliament passed a law specifying that mortgageholders could buy their own francs from wherever they liked andmake the payment themselves. Mortgage payments fell.
But most Europeans exchange only minimal sums annually,their need for currencies limited to a handful of weekends awayor an annual summer holiday - and only then if they leave theeuro zone. Those who do notice they are getting a worse dealtend to just swallow it.
"The public really didn't get any of these big internationalscandals, they haven't understood the impact on them," says AndyLove, an MP charged with overseeing Britain's financial sectoron the UK parliament's Treasury select committee.
"Whether the commissions and costs to the consumer areproportionate, I don't think we have really looked at that. Iwould say we should. But no-one is beating down my door toindicate that they got a lousy deal on foreign exchange atHeathrow airport."
Still, interest in how best to exchange currency is growing.Before a lull in the past year which most cast as temporary, theglobal currency market had tripled in size in just over a decadeto be worth more than $5 trillion daily.
Much of that is the result of the globalisation and the easeof communication and global trade. But it also reflects growinginterest among ordinary consumers.
"People are more aware of currencies and what their valueis," says Brendan Callan, European chief of internet-basedretail foreign exchange platform FXCM. "Sooner or later peoplestart to say: you know what, I have a view on that."
Back at Best in London, Sakthi says he is increasinglylooking at another bigger and complementary market in banktransfers, where he says banks are charging current accountholders such large spreads he can beat them even when heswallows the fees the banks charge himself.
His business is beholden to banks for a number of basicservices and he is very reluctant to criticise lenders outright.But when pushed on the issue of competitiveness he says with asigh that he thinks the banks "could do better".($1 = 0.7331 Euros) (Additional reporting by Clare Hutchison in London Editing byJeremy Gaunt)
