This article was written by Konstantin Rabin, CEO at Forex Library.
Retail FX is certainly an overall profitable niche, yet it gets harder every day to find the best markets.
Konstantin Rabin
It is quite common to see the vast majority of unregulated Forex brokers going into Asia, especially Southeast Asian countries. This is why it just became overly competitive. The US market is heavily regulated, and only a few brokers have shown interest in locking up an enormous amount of cash in exchange for the NFA regulation. Europe has been the key market, however, it might no longer stay like this due to the regulative updates coming from CySEC and ESMA in general. Russia and CIS are very mature countries and competing against such brokers as Alpari may not be the best idea. Today I will tell more about retail FX in Latin America and will explain why it may be the a perfect continent for launching retail FX services.
Lack of Local Competitors
If your brokerage converts the traffic via a call center in Cyprus or Israel, it might be quite hard to compete with the brokers that actually have some local presence. Even though there are local brokers in Latin America, the competition seems much lower than in Europe or Asia.
From what I know, Capitaria is the only large FX broker that is headquartered in Latam. Apart from that, there are a few major players with the local presence: Admiral Markets, Saxo and XTB. Perhaps I missed someone here, but the list does look short.
One Language to Rule Them All
Well, the statement above is not really true. We all know that they speak Portuguese in Brazil and that the country is huge, both in terms of the size and the population. There are also a few tiny countries and territories like the Republic of Suriname where they don’t speak Spanish. Still, the population of Latin America is estimated to be 630 million and if you throw out non-Spanish speakers, you will still have over 400 million potential clients.
One may argue that the market is much smaller due to the level of internet penetration. This is a valid point. Not every country in Latin America is highly developed. For example, in such countries as Mexico there are only 45% of the population connected to the web. On the flipside it is growing exponentially, only 10 years ago this rate was below 20%. Also, there are such countries as Chile and Argentina, where the online rate corresponds on a European average.
Lower Risks
This one is pretty much subjective. I feel that for a broker it is much better to have 1,000 clients with an account balance of 500 dollars than 10 clients with a deposit bonus 50,000. Having “big” clients is quite risky, especially if you are a market maker. Typically, the clients from Latin America are less well off than Europeans, yet the Cost-Per-Acquisition in these countries would be considerably lower too. Hence, a broker may onboard more clients at lower costs, while the earnings per client tend to be smaller too.
Again, here one can argue that having more clients of a lower value still requires a broker to invest more in the support and sales. This is definitely true. However, the average salaries and other operating expenses in Latam are significantly lower than in Israel, Cyprus or most of the EU member states.
Non-EU Regulation
One thing is that a broker may operate in Latam countries without any regulation much easier than it could in Europe. Even though this is certainly not a recommended approach, it does sound like an option. Apart from that, a broker may serve clients from Latam under its ASIC license, hence this continent is less dependent on ESMA policies. Finally, it is possible to obtain a local regulation, Chile and Uruguay seem to be amongst the most popular countries for FX brokers.
The final thought
Retail FX has matured in most of the countries and it has become extremely difficult for a broker to come up with a perfect combination of its geographies. While many brokers have started operating without any call center, it may actually be a good idea to open up a local office in one of the Latin American countries and try capturing this continent. The risks, earnings and costs tend to be smaller, but it also seems that becoming a leading broker in these countries is not as challenging. Apart from that, the market is not as mature and could show some great potential in the coming years.