The following article was written by Brandon Russell, CEO of Etana Custody.
Today traders find an overwhelming variety of Account funding options offered by forex brokers. The deposit options proposed by the broker depend on their clients personal preferences, location etc., with the most popular ones being Credit Card deposits, Bank wire transfer or by using alternative Payment Service Providers (PSPs).
The credit card option is quite widespread. With this payment method traders fund their accounts either directly through the deposit page on their broker’s website, or by depositing first into their PSP wallet account and then transferring the funds to the brokerage.
It is worth noting that some brokers and PSPs accept deposits by credit cards from their clients without conducting proper KYC compliance checks. This heightens the possibility that their clients could have ties with organized criminal activities such as drug trafficking, various forms of money laundering as well as funding of terrorism.
Another observed tendency includes a change in the way credit card transactions are accepted – through alternative payment mechanisms.
Because some governments oppose restrictions to the way people can use their money in the form of laws that prohibit or add great complexity for an everyday person to make a bank transfer across borders, people look at PSPs as an alternative and still legal way to fund a trading account using Credit card or other method with an overseas brokerage they want to do business with.
We can think for several reasons as to why Forex traders choose to fund their accounts via a credit card:
- First, convenience and speed of deposits and withdrawals – traders need to just log in to their Forex accounts, input their credit card data. The processing of the deposit will usually be processed on the same business day.
- Second, insufficient cash on hand – as some traders may not have a particular amount, which they intend to deposit, in cash, so they prefer to borrow money from their bank.
On the other side of the transaction, brokers view credit card payments as an additional opportunity to quickly expand their client base.
This convenience and access to money however does carry risk for both, the Trader making the payment and The Broker accepting the Payment.
Just by typing in the credit card information on a website, clients place themselves and their funds in danger. There is a level of uncertainty surrounding the security of the data clients share on payment/deposit pages which could lead to unauthorized transactions Credit cards represent a form of borrowing. If we take into account the cannonade of fees as well as the average annual interest rate (12-19%), which credit card holders are charged, this raises a key question – whether a trader’s annual return from trading activities is sufficient to cover all the expenses on his/her credit card, let alone to make a profit.
What should raise an even deeper concern is the scenario, where a trader loses their entire deposit (credit card limit) due to poor money management or an inappropriate trading approach and is unable to make their monthly payments on their credit card. If the trader misses payments, a multitude of fees and constantly increasing interest rates will be charged by the credit card issuer, ultimately impacting access to future credit and being heavily indebted.
Forex Brokers take on a great amount of risk when accepting deposit via Credit Card. Firstly the Payment processor, charges the company a high fee, that varies between 2 and 7% from the total Deposit. His clients expect to see the full deposit funded in the trading account, this puts STP brokers at a loss, just by accepting the clients’ deposits.
Another risk facing brokers is the Trader issuing a chargeback which can be done up to 6 months after the initial deposit. Disputing a chargeback case for credit card is almost never in favor of the business holder even if they provide proof of trading history, proof of declaration of deposit and properly conducted KYC and AML due diligence.
This becomes a way to drain a broker out of his operational capital and can be used in unethical and illegal fight between Competitive companies in a fight over a share of what is already extremely competitive market place.
So, what is the bottom line? To expose borrowed money, especially more than one can afford to lose, to extremely risky market environment such as Forex may be an utterly unwise decision. Meanwhile, an extensive study encompassing roughly 15 000 retail forex accounts has recently concluded that the majority of accounts funded via a credit card transaction were unprofitable.
In this line of thought… Back in 2015 the decision made by USA regulators to prohibit credit cards as a method for funding Trading accounts and other highly speculative spheres was not a surprise.
The matter involving the ban on retail Forex account funding by using a credit card and related payment methods was first proposed in the United States in early 2013 by the National Futures Association (NFA). However, the ban itself came into force on January 31 st 2015 and affected all US-regulated Forex brokers. At that time, approximately 75% of the market was dominated by FXCM, OANDA and Gain Capital’s Forex.com.
Due to the high volatility of the Forex and futures markets, the considerable risk of loss as well as the chance of a total loss occurring within a very short time stretch, the NFA insisted that all Forex Dealer Members and their Associates should be prohibited to accept credit cards from their clients as a method of depositing funds into Forex or futures accounts. The ban also came into effect for electronic payment methods, which are linked to credit card use. The latter included PayPal, Skrill and ChinaPay among others.
As postulated in the NFA’s Interpretive Notice, Compliance Rules 2-4 and 2-36 require all Forex Dealer Members and their Associates to ”observe high standards of commercial honor and just and equitable principles of trade in the conduct of their forex business”. Thus, by accepting credit cards from their retail customers, Forex brokerages may end up violating these compliance rules and may also obstruct the NFA in fulfilling its mission to protect investors.
By taking such a measure, regulatory authorities in the US, in fact, made certain that the entire segment of retail Forex customers is limited only to participants having their own capital for trading purposes. In doing so, individuals, who are prone to take part in speculative deals but who do not have the actual means to do so, were obviously deprived of any opportunity to gain access to the Forex and futures markets.
It is possible that in the near future, Financial Regulatory Authorities around the world, would make a decision to follow the example set by the NFA on this matter in their effort to make a safe environment for people interested in speculative investment products.
We are interested to hear your opinion on this matter. More precise: “Do Credit Card deposits for Forex Trading add additional risk for the Trader/Investor”