New websites dedicated to rewarding active traders are on the rise, is it a short-term spike or a genuine business model?
On-line Foreign Exchange trading has been gaining momentum over the years as investors' understanding of financial markets is evolving and access to financial products is readily available through the internet and mobile phone. Forex brokers have been spreading their message through many mediums including offline and online sources as they attempt to benefit from the promising growth in FX.
Traditionally, a banner advert was placed on a popular website and the broker was charged through a variety of options such as; cost per impression, click-through rate or once a live (funded) account was opened. Forex related words are heavily searched on google and the number of Forex related websites boomed. This has resulted in a congestion of information on the main FX portals, many of them have over 15 brokers all trying to fight for the most prominent positions. It seems the portals were losing their charm and traders weren't finding good content on their sites that help them in their trading.
Consequently, a new type of portals has arisen providing brokers with their new ‘bate’, enter the cash back or rebate portals.
The concept which started a few years back is based on the traditional introducing broker/ agent model where an entity (the IB) is rewarded for making introductions (clients) to brokers. In this model the cost the end-user pays (spread) is shared between the IB and the end-user, thus benefiting the client, the IB and the broker. The model is very useful for brokers because it is focused on active traders thus filtering out novice or one-off traders and generates healthy volumes.
The procedures are very simple, the trader trades with their appointed broker that the cash back/ rebate website has an IB relationship with. All rebates that are accounted for by the trader are input to the IB's Merchant Account . At the end of the month the IB passes back the set amount to the client.Tobias Dijkstra a trader from Netherlands trades FX regularly via a cashback site comments: "I have received my payment from them in my Paypal account on time". Apart from the rebate element traders are anxious about getting funds paid back as it shows the IB is genuine.
The rebate sites are an excellent enhancement to the traditional news sites as users are active traders, thus eliminating the information seekers. Furthermore the rebate sites have included many features like; live news, brokers review and forums thus providing the user useful information which keeps them hooked to the cash back website. The rebate sites can support a broker's sales strategy and provide a regular flow of clients. Owen Kerr, Director of Pepperstone an Australian FX broker says "Rebate providers are great advocates for our business, they help clients avoid the pitfalls of selecting a broker, including steering clients away from some of the more unscrupulous operators in the Retail FX marketplace". Traders in FX markets use websites, forums and review sites to assess brokers, Owen adds "Having a 3rd party endorse your firm gives clients confidence in their broker and generally results in higher deposits".
How much of a competition are these sites for FX brokers? There are two sides to this point; on the one hand rebate / cash back sites bring in the high-end clientele - active traders who are looking for brokers that are willing to share a piece of the cake, this could mean an influx of 5 to 10 live funded accounts per month.
On the other hand, brokers and rebate sites are both competing against the same client; consequently this has led to brokers offering clients rebates on their trades. With pricing already shrinking on major instruments like EUR USD and FTSE the key question is; how far brokers will stretch their offerings, rebates of >50% of the spread?
Nonetheless, rebate sites will continue to be popular as FX traders are always keeping up to date with the industry in general.
Alex Ivanov of FXRebateGurus, a popular rebate site, shares his experience of what attracts traders to rebate sites "We find that many clients would simply go with the highest rebate offered, even if it means they will pay more in transaction costs overall. So psychologically the client loves to get a great deal". In addition, the larger rebate portals have direct relationships with managers at many brokerages, this is useful for clients because if there are any issues or concerns the rebate portal acts as an intermediary to resolve the issue, an added service Alex’s team provides.
Rebate sites will need to ensure they have a selection of tools and resources for traders as the number of rebate sites grows and traders look for useful add-ons apart from the simple cash back offers, signal services have become very popular as they complement the new copy trade concept thus giving retail traders more of a reason to continue trading.
FX brokers should take the rebates sites with a pinch of salt as these relationships can change dramatically. The friend can easily turn to foe as rebate sites hold a handsome database of live, funded, traded – active accounts. In this context we can reflect on a famous quote by Edward Dahlberg "A strong foe is better than a weak friend". Advancements in technologies, (full front to back platforms), reduction is set-up and operational fees and consultancy services (regulations, company formation) for start-up brokers have made it easy for new firms looking to get established in the world’s most liquid asset class and who is positioned better than cash-back sites to make this step?
