In the first three parts of our How to Start Your Own Brokerage series, we looked specifically at the technologies your organisation will require, and gave a brief breakdown of departmental structure. In this final part, we’re going to focus on several of the key relationships that your business will need and explain why they are vital to your success.
We start with banking as without a banking relationship your business cannot get off the ground to begin with. Banking relationships are often contingent on your brokerage being regulated in the jurisdiction that you’re attempting to open your company accounts in. There are several harder (FCA,ASIC, CySEC) and softer (VSFC, FSA, CIMA) regulatory jurisdictions that your brokerage can apply to get licensed in. These jurisdictions vary in how strict they are in terms of reporting and business practices, as well as the actual cost of attaining regulation.
The largest of these costs is your capitalisation requirement. Depending on the regulator, you will need to set aside a lump sum to be granted a license. This is to guarantee the solvency of your brokerage business. The amounts vary between regulators and also depend on what kind of business model you will be running (market maker vs A-book, holding client funds or not). In a future series of articles we’ll be delving specifically into regulation so as to provide you with updated information on the current regulatory landscape and to explain the pros and cons of each jurisdiction.
PSPs & Crypto Gateways
PSPs (Payment Service Providers) and crypto gateways, are entities that provide your business with the ability to charge your customers’ debit/credit cards and also accept cryptocurrency payments. This is an area of the industry that is constantly evolving, with a plethora of PSPs constantly entering and exiting the online brokerage market. PSP relationships are industry specific, with many not willing to serve the online trading industry. This has led to the growth of a large number of smaller providers who are willing to offer these services to brokers.
PSP relationships are also dependent on your regulatory jurisdiction, the countries in which your bank accounts are held, and the locations of your traders. In this constantly shifting market, nowadays most brokers use multiple PSPs for different segments of their clients, and rely on software that monitors payment success rates, and that can route payments to the PSP that is most likely to process an incoming transaction. Keep in mind that solid PSP relationships are crucial to customer retention, as your traders will demand that you are able to process deposits and withdrawals in a fast and trouble free manner. It’s also crucial to be aware of your PSP’s fee structure, and the cycle time for settlements.
Our Panda CRM offers this feature, allowing your finance team to monitor PSP performance and Intelligently route transactions to the PSP most likely to succeed.
Finally, we move on to affiliate and IB relationships. Both relationships involve incentivising outsiders to send you traffic, high-quality leads, and traders that are able to increase the volumes that your brokerage generates. The main difference between these two kinds of relationships, is that affiliates are normally webmasters with their own successful trading-related websites that attract a lot of traffic, whereas IBs (Introducer Brokers) are individuals and organisations (typically money managers and other trading professionals), who have developed relationships with large numbers of existing traders and will be willing to send these traders to your services if you can entice them with competitive commissions and rebates. So, to keep things simple, affiliates operate primarily in the online sphere, whereas IBs favour the personal touch and tend to build relationships with higher net worth traders at conferences, webinars or via in-person meetings.
One thing that many newcomers to the space fail to realise at first, is that even in today’s online world, a sizeable percentage (if not the majority) of many online brokers’ volumes come directly from IB activities. For this reason, it’s not as simple as building a flashy website, purchasing all the right technologies, and opening your brokerage for businesses. If you want to remain competitive, you will have to find ways to attract and keep successful IBs happy in order for your trading volumes to soar. This is particularly so in the highly lucrative Middle-Eastern and Asian markets, where a great deal of business is still conducted face-to-face.
Panda Consulting Services
Aside from being a highly respected and experienced technology provider in the space, over the years PandaTS has ventured into all the above areas and has developed long-standing relationships with numerous regulatory professionals, PSPs, affiliates and IBs. Panda’s experienced success team will be able to point you in the right direction, while helping you avoid the pitfalls of PSP/affiliate fraud. Our turnkey solutions for new and existing brokers do not just end with technology development, integration and support. We offer a complete consultation service in which we help our customers plan their new brokerage, implement the relevant technologies, and also build relationships between all they key parties that you will need to guarantee a strong entry to the market and long-lasting success.
Thanks For Reading!
We hope you enjoyed this how-to series and gained a lot from it. Keep referring back to our PandaTS blog for updates and fresh content.
If you have any questions, or would like to learn more about online brokerage and our products, don’t hesitate to contact one of our success managers for an in-depth consultation.
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