While white label agreements tend not to mention which bank has supplied the technology, Lloyds’ clients are fully aware that it is BNP’s suite of execution algos that they are accessing – one of the first time’s this has happened with an FX product in general, not just in the world of FX algos. To offer FX algos to its largely corporate UK client base for the first time, Lloyds evaluated whether it was more beneficial to build, buy or to partner with BNP to create its offering, says Razaq.
“Building an offering does offer flexibility and control, but the downside of building an algo suite is that this comes at a very significant cost,” Razaq adds. “Also, since I started building this business 12 years ago, fees have contracted significantly. The return on investment is a difficult one to realise in this landscape. The other issue for banks just starting out in the algo space is that it is now a long road to catch up to a leading provider such as BNP.”
Razaq notes that there are also drawbacks to buying an ‘off the shelf’ product from an independent technology provider as many are trying to sell the same product to other banks as well, making it difficult to differentiate the product to clients.
“We also believe that a bank-based solution, as opposed to a technology company-based solution, is significantly different,” Razaq adds. “Banks can bring in their trading expertise when creating the technology products, as well as franchise benefits such as the use of internalisation. That is something you cannot achieve with an off-the-shelf product. So the perfect solution would be to partner with an existing tier one algo provider.”
In the past, banks were of the opinion that there was no reason to sell their product to a competitor, Razaq notes. He explains: “At BNP we have decided to take a different stance. We have done a phenomenal job having built a cutting-edge product that now has one of the largest market shares of the algo space. But we are now at the point where in order to grow our global footprint even further, we need to start targeting clients that are outside the BNP universe.”
Gold Label agreements
The UK corporate market is one area where BNP was keen to expand its footprint and a sector which the Lloyds franchise is especially strong. Rather than trying to get direct access to that client, which can prove a complicated process, Razaq explains that BNP is instead selecting one partner bank in that region which has access to these clients.
“These ‘Gold Label’ agreements are a way to grow our market share indirectly through our regional partners, where the end client is comfortable knowing they are using a market leading product and then they benefit from all of the utilities we have developed for our direct clients,” he adds. “We are also able to avoid using key bank resources such as balance sheet, opening up credit lines or completing a KYC on that client to onboard them, which all comes at a big cost. We can avoid all of that and utilise our partner banks existing investment, already having all the balance sheet and KYC from on boarding that client, while we still see the flow that client indirectly via by our partners.”
Anonymous client flow
In addition, Razaq highlights that this client flow is always anonymous, with BNP unable to see the end client’s name on this part of this agreement. “This is an effective way for Lloyds to protect their client base and still provide their clients with a best-in-class product,” he adds. Furthermore, algos are now coming under more stringent regulation, having been included in the FX Global Code of Conduct. This means that new algo providers must ensure that transparency is provided to the end client around how the algorithms work. “How you are set up within the bank and who sees that algo flow is increasingly being included in new guidance coming from regulators as well, in addition to making sure that banks are taking responsibility for the algorithms with circuit breakers, kill switches etc. There is now a lot of red tape that comes with providing an algo service to clients and providing an algo to trade on markets.”
Essentially, the new arrangement is termed ‘Gold Label’ as opposed to White Label to let the market know that this is a solution that ensures full transparency, Razaq says. “It is not hiding the fact that there is another bank or technology provider behind the solution. We believe that being transparent adds a certain level of trust with the end client,” he adds.
“BNP’s Gold Label also comes with an exclusivity clause attached to it. We plan to only provide one bank in each target region with a Gold Label agreement. For the UK, we partnered with Lloyds – and we are currently talking to other banks in their respective regions to give them that sane level of exclusivity under this new arrangement.”
