Previously, foreign currency for miscellaneous spend in case of overseas travel was serviced in an expensive fashion largely by grey market operators. However, digitalisation and online transactions are setting this industry up for a tectonic shift. Integration of technology, and a high personal understanding of the sector, is reflected in the discussion that Ananth Reddy, the promoter of BuyForexOnline, had with Pankaj Joshi.
How did BuyForexOnline come into existence?
As an individual, I have been involved in the forex industry for the past two decades. Due to stringent regulatory requirements, I had to close down my business in 2006 and later took employment in the same business.
Over the past decade, the Indian travel industry saw a gradual shift in their transaction needs—shift to online. This raised a question in my mind—why couldn’t the forex transactions be done online? That was the genesis of our business which started four years ago, funded in a small way by family and friends, and this time with proper awareness of RBI regulations.
Forex needs of travellers can be segmented into either corporate or leisure travel. Most organised players focus on corporate travel, which is low-hanging fruit and gives steady volumes. The leisure travel segment – where client acquisition is more difficult and transactions are geographically widespread – has traditionally been served by the cash-based grey market. The attraction of the leisure travel segment is that payments are upfront and there is no credit period.
Our product suite consists of the prepaid forex card, which is absolutely comparable to a debit card, including usage at overseas ATMs and the cancellation facility in case of theft or damage. We also deal in physical currency which is only around 10 per cent of our total volumes. We encourage travellers to keep physical currency only for minor needs and emphasise the utility of the card. Our average transaction value is USD 1,500 and over. In our four-year operations, we have had 60 per cent repeat business.
What are the industry characteristics and how have you evolved in that context?
Post-demonetisation, there were two major shifts in the industry. Firstly, we saw an increase in demand for forex which was seen as a new avenue for parking funds and an alternative to gold and real estate. This saw the rates rise for physical currency, and hence made our product comparatively attractive for genuine travellers. The second development was a greater willingness to transact from bank accounts, which benefited organised players.
For India, the forex currency requirements for travel (excluding trade) are currently USD 10 billion, in which leisure travel requirements are USD 6 billion. Of this, 70 per cent is currently serviced by the unorganised grey market and online overall would hardly be 2-3 per cent.
A major pain point presently for the industry is the duration of a transaction and the difficulty in holding a rate till then. The process of a prospective buyer getting a quote, getting a payment instrument (say demand draft) and making payment to forex seller sometimes entails more than a day. In that time, rate can fluctuate by maybe 1 per cent or more. This has been the reason that margins are traditionally kept high. Anyone who is willing to close the loop immediately through online digital transactions can enjoy competitive rates. This is one more reason for our type of model to grow.
To give some perspective, if one buys currency at the airport, the extra charge is 18-20 per cent. If it were done on a credit card, the charge would be between 8-11 per cent and at a bank it would be 3-3.5 per cent. The organised sector players take 2-2.25 per cent and grey market operates at 1.5 per cent. Online transactions have a 1 per cent load. You can see the value proposition here.
On regulations front, Reserve Bank of India (RBI) has specified that anyone operating in any region needs physical presence. Hence, we have a tie up with Paul Merchant on a revenue-sharing basis. This association takes care of the order fulfilment part and we look at the front-end. The physical inventory in their basket is typically 15-20 per cent of our daily transaction volumes, which currently stands at Rs 20 lakh across 5,000-8,000 transactions.
The actual card we provide is issued by private banks – ICICI, Axis and HDFC – in their name, for which we get an incentive and do not charge the customer. The customer gets the card at a very small surcharge over the interbank rate. The bank name on the card is part of our trust creation initiative. We also have a 24-hour call centre and a welcome call system. The challenge is to create awareness and reach, to make the customer realise the efforts done by us in the direction of transparency and trust creation. We aim to change the mind set of clients so as to accept account-based transactions. We believe the non-digital segment of population is shrinking fast. Even now, 98 per cent of customer payments we get are online-based. The total cards issued in FY2017 were close to 7,000. The aggregate transactions done by us stand at around 15,000-16,000. (The aggregate transactions represent the cards the company has sold/ refilled in its four-year history.)
For immediate expansion of our basket, we are looking at a B2B channel and tie-ups with small and medium providers of international travel packages. They give an additional service to their customers and they get a commission whenever the card is used. Our USP is to bring transparency which will create trust.
What are the triggers and stumbling blocks for market expansion?
For our own expansion, we have agent acquisition teams in five cities, but much is still left. The quantum of leisure travellers in tier-II cities and below is massive.
One big B2B channel for the industry as a whole is forex requirements related to outward remittances for students. When you tally the fee payment and living cost, plus any medical treatment abroad, it is close to USD 10 billion. The film industry requirement is part of the USD 10 billion industry figure. Right now our revenue contribution from this channel is a mere 10 per cent, but we are talking to consultants in educational sector and we see a clear growth path for ourselves there. If we talk of inbound remittances of USD 72 billion, that part is more or less sewn up between bank to bank transactions and then players like Western Union and Moneygram. So, there is very little space for the online players.
Leisure travel itself is huge in potential. Industry estimates 50 million international travel transactions from India in 2020 and onwards, which means around 15 million related forex transactions which would aggregate USD 22-25 billion just as money-in-hand.
At industry level, once digital payments and Aadhaar usage become prevalent, the security matters will get sorted. Payments moving to mobile devices and tightening of regulatory measures are good signals. The current account convertibility which is being discussed will also be a massive trigger. As far as multi-currency wallets are concerned, technical requirements have been largely sorted out but regulatory structures are needed. The inter-country dependence for regulation means that all parties need to go slow.