These days, we see the term “peer-to-peer” describing all sorts of new businesses. There’s P2P lending, where people bypass banks and lend money to each other. P2P carsharing, P2P livery service, P2P lodging. Real estate agents should advertise as facilitating P2P house trading. When people buy or sell houses, they’re almost always transacting with other customers, not businesses or professionals, so it seems totally P2P to me.
I ask, “What qualifies as peer-to-peer?” because I see CurrencyFair and TransferWise using the term to imply that you can exchange money directly with another customer instead of going through a bank. The thing is, that’s not at all how it works at CurrencyFair despite their early marketing materials depicting customers transacting with other customers. CurrencyFair have come clean and admitted how it really works in the fine print on their site, but they continue to use the term “peer-to-peer”. I’m pretty sure TransferWise also doesn’t match customer orders only with customer orders and I’m about to begin investigating to check if they’re profiting off of imbalances in customer order flow, but my speculation as to what they might be doing is for another post.
Consider a used car dealership. Used car dealers could argue that they’re a peer-to-peer business. As if they’re just providing a service of matching buyers with sellers. But I’d say that they’re not P2P because the buyer doesn’t know what price the seller received. Neither the buyer nor seller can tell the true cost of the transaction. The dealer’s profit comes from holding inventory and offering different prices to buyers and sellers. With real estate, on the other hand, buyers are truly matched with sellers while the brokers take a 6% commission with all the compensation out in the open for all to see.
CurrencyFair operates a platform on which parties (not just customers, as we will see) can exchange currencies and pay 0.15% in commission. However, because it’s unlikely that customer orders come in equal and opposite quantities at the same time, CurrencyFair operates its own currency dealing business that will always offer to trade at 0.5% worse than the going rate for currency. So most customers actually trade with “the house” and pay on the order of 0.5%. I asked CurrencyFair if I can become a participant dealer and improve pricing by offering money at 0.4% worse than the going rate at all times, but they wouldn’t let me. They won’t even let me place an occasional order to buy a currency that I want to buy, at the mid-market rate with any customer that comes along. Because exchange rates move so fast, it’s nearly impossible that two customers will trade with each other unless they’re allowed to enter orders that track mid-market. If I place an order at mid-market, the market will move and CurrencyFair’s dealer will trade with my now stale bad price before a customer gets to benefit from it. That’s about as peer-to-peer as a car dealership where a seller just might happen to run into a buyer in the parking lot and negotiate a direct deal.
Is there legal precedent for such a business? Stock exchanges used to be owned by their members. The New York Stock Exchange was a venue for brokers and dealers to trade with each other and would charge a commission for each trade. But because customer orders to buy and sell stock (brought to the exchange by brokers) don’t come in equal and opposite quantities at the same time, the dealers (who owned the exchange) would trade with the orders at slightly unfavorable prices. That’s a lot like how CurrencyFair takes a 0.15% commission for each transaction and at the same time the people who own CurrencyFair always get to trade at prices in their favor. The difference is that the way the NYSE worked was fairly widely known. Customers didn’t like overpaying for transactions, but knew that feeding the dealers was just part of doing business. It didn’t feel as much like a deceptive scam.
I can summarize it like this:
- Car dealers don’t tell you black book prices. Yeah, you’ve never even heard of it, right?!
- CurrencyFair doesn’t tell you the fair price for your transaction, which would let you see how much you’re losing.
- TransferWise shows you a fair price, but probably not the fair price at the time they decide that your transfer will definitely be executed.