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Can Kantox re-invent FX hedging?

by LLB Reporter
10th Nov 11 7:39 am

Philippe Gelis’ creative solution to FX risk means exporters can cut costs and avoid the tricky derivatives market

Last month I reported on web start-ups which would revolutionise banking. In response I got an email from a firm I’d never heard of, Kantox. They claimed to be a disruptive force in the field of FX hedging.

So I asked Kantox co-founder Philippe Gelis, 32, to tell me about his ambitious start-up.

Hi Philippe. Tell me, why on earth does the FX industry need shaking up?

Let me tell you a story. Three years ago at I was consulting at Deloitte in Barcelona with my partner, Antonio Rami. We were doing consultation work for a Spanish company which exported cava to the US. It was medium-sized with £50m turnover. This company had a lot of FX risk and in 2008 had experienced a large FX loss.

We recommended they go to their bank and buy FX hedging products. We looked with them at the products, but none of them fitted their needs. They were expensive, quite complicated as they are derivatives, and the bank required margin deposits. Finally the firm decided not to hedge. They preferred to remain exposed to FX risk than hedge with bank products.

I knew then that something completely new was needed.

What’s your solution?

Here’s how I explain Kantox to people who are not from the financial industry: If you go on holiday to the USA you need to exchange money at the airport, pounds for dollars. But the money exchange desk at the airport will you give a very bad rate.

The alternative is to go the Arrivals area, find an American who is coming to England for holidays, and agree with that person to change their dollars with your pounds at mid-market rates. It is simple barter cleared at the mid-market rate. Kantox is a place where firms can do that. They exchange dollars for euros or pounds at the mid-market rate.

The important thing is that the two parties agree to change their currencies in the future, say, in three months. That way they hedge against the currency moving during that time.

Sounds simple

It is a simple barter arranged to take place in the future. There are no derivatives. Nothing complicated. It is how trade was organised centuries ago, when merchants agreed to pay a certain amount of money in three months time.

Sounds a bit like Taavet Hinrikus’ start-up Transferwise

I have a meeting with Taavet in one hour! Transferwise is focused on individuals. They offer spot transactions. Their solve the problem of high bank fees. In our case you hedge against currency movements over time. The main problem for our clients isn’t bank fees, it is the volatility of the currency over time. 

How does Kantox make money?

We charge between 0.05 and 0.48 percent  of the hedge, depending on the size of the hedge. For large firms the cost of hedging is effectively zero.

What can go wrong with a Kantox hedge?

If you sign with a counterparty, and they can’t pay, the principal is never at risk. All you lose is your hedge. But we do due diligence at Kantox, so we allow firms, or not, to use Kantox. And both companies sign a financial agreement. If one doesn’t respect this agreement we have global collection agency, Coface, to collect payment and penalties. You don’t have to chase the payment yourself.

Is Kantox live?

We have been online since early September. We were waiting for FSA approval. We have had it for one month. For one month we have been making transactions.

Any customers yet?

We have 12 clients, with revenues between Euro12m and Euro4bn turnover. The largest is a Spanish  travel industry company. We think our core business will be medium sized companies, with turnover between Euro50 and Euro250m. But we are available for smaller and larger companies.

What funding have you got?

So far we’ve done one small financing round of Euro150,000. Investors include people in the FX industry, investment bankers, entrepreneurs in the web industry in Spain and some partners in Deloitte. We have some very active investors.

Is that enough?

We want to get traction until the end of the year. By the end of the year we want 30 clients. That will prove our service has potential. Then a £1m funding round.

Since your team is international, how did you end up in London?

Our IT team is in Barcelona and all the financial stuff is dealt with by the team in London. Why London? First because we wanted to be regulated by the FSA. And it is much better for FX to be in London. Venture capital is much larger in London. In Spain VC is very traditional, making it hard to find large financing.

And we need large financing. So much better to be in London. When you have FX you can be in London or New York, but not Barcelona.

And what’s the five year plan for Kantox?

We hope to be big. Our plan is to get traction now. Get that £1m funding round to consolidate the back end and hire marketing people in the USA. We are focused on the UK at the moment. Then comes Asia and the US.

 

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