MAC3703
EXAM PACK
2025
,MAC3703
Assignment 2
Semester 2 2025
Due 30 September 2025
Foreign Exchange Market for Travellers
(a) Risks and Benefits of Main Strategic Options for Existing Banks
Existing banks face significant disruption from challenger institutions that offer multi-
currency accounts and peer-to-peer (P2P) exchange platforms. To protect their foreign
exchange revenue—traditionally secured through wide buy–sell spreads—they must
adopt well-considered strategic responses. The following sections critically evaluate the
primary options, highlighting both benefits and risks.
Internal Innovation (Developing Multi-Currency Accounts and P2P Applications)
Benefits: Developing in-house multi-currency products allows banks to retain
customers by offering competitive features such as fee-free currency holding, superior
exchange rates, and app-based convenience. This strategy fosters customer loyalty,
opens cross-selling opportunities (e.g., integrating travel insurance or loans), and
generates new transactional revenue streams while safeguarding data and regulatory
control. In South Africa, where spreads remain high, capturing technologically savvy
travellers early could secure market share in a multi-billion-pound sector.
Risks: The primary drawbacks include substantial upfront investment in digital
infrastructure and challenges in integrating new systems with legacy platforms. Adoption
is uncertain, particularly if challengers outpace banks in agility. Innovation may also
cannibalise existing high-margin FX revenues, causing short-term earnings pressure.
Moreover, compliance requirements—especially anti-money-laundering controls for P2P
,services—pose regulatory risks, and a poorly performing launch could damage brand
credibility.
Partnerships or Acquisitions of Disruptor Banks
Benefits: Strategic alliances or acquisitions provide rapid access to innovative
technology, customer bases, and technical expertise. Integration of disruptors’ P2P
solutions could create hybrid offerings, accelerating scalability and enhancing customer
trust through the established bank’s reputation. This model leverages synergies: while
disruptors benefit from volume expansion, incumbents offset shrinking margins through
higher throughput and cross-service bundling.
Risks: Integration challenges are common, including cultural misalignment, operational
disruption, or key talent attrition. High acquisition costs may not yield proportional
returns if disruptors’ business models fail to scale sustainably. Additionally, concentrated
markets like South Africa are prone to antitrust scrutiny, potentially blocking deals.
Partnerships that fail expose incumbents to reputational risks, especially if disruptors
face data security breaches or regulatory issues.
Competitive Pricing Adjustments (Narrowing Buy–Sell Spreads)
Benefits: Reducing spreads enhances competitiveness by appealing to price-sensitive
travellers. Higher transaction volumes, supported by economies of scale, could partly
offset thinner margins. Bundling with complementary services (e.g., travel insurance or
concierge services) further strengthens customer retention. In highly profitable markets,
this approach positions banks as customer-focused, potentially discouraging challenger
entry.
Risks: Lower spreads immediately erode profit margins, with no guarantee that
volumes will increase sufficiently to compensate. The strategy risks signalling
vulnerability, encouraging further challenger activity. Crucially, this defensive approach
lacks long-term strategic depth, as it does not address the structural shift towards digital
convenience. Over time, failure to innovate risks obsolescence.
, Lobbying for Regulatory Barriers
Benefits: Incumbents can leverage established political influence to slow challenger
growth by lobbying for stricter licensing requirements, capital adequacy standards, or
consumer protection rules. Such measures may preserve profits temporarily while
banks adapt internally. Regulation can also enhance systemic stability, indirectly
benefiting consumers.
Risks: Regulatory capture strategies can backfire, provoking consumer backlash and
reputational damage by portraying incumbents as anti-competitive. Ethical concerns or
breaches in lobbying conduct risk fines or sanctions. Furthermore, even if successful,
regulatory barriers do not address underlying market changes. Should rules later relax,
challengers may re-emerge with greater legitimacy and public support.
Overall Evaluation: A balanced strategy that combines internal innovation with
selective partnerships offers the most sustainable pathway. While lobbying and pricing
adjustments may provide temporary relief, long-term competitiveness will depend on
incumbents’ capacity to innovate and integrate digital-first solutions without undermining
customer trust.
EXAM PACK
2025
,MAC3703
Assignment 2
Semester 2 2025
Due 30 September 2025
Foreign Exchange Market for Travellers
(a) Risks and Benefits of Main Strategic Options for Existing Banks
Existing banks face significant disruption from challenger institutions that offer multi-
currency accounts and peer-to-peer (P2P) exchange platforms. To protect their foreign
exchange revenue—traditionally secured through wide buy–sell spreads—they must
adopt well-considered strategic responses. The following sections critically evaluate the
primary options, highlighting both benefits and risks.
Internal Innovation (Developing Multi-Currency Accounts and P2P Applications)
Benefits: Developing in-house multi-currency products allows banks to retain
customers by offering competitive features such as fee-free currency holding, superior
exchange rates, and app-based convenience. This strategy fosters customer loyalty,
opens cross-selling opportunities (e.g., integrating travel insurance or loans), and
generates new transactional revenue streams while safeguarding data and regulatory
control. In South Africa, where spreads remain high, capturing technologically savvy
travellers early could secure market share in a multi-billion-pound sector.
Risks: The primary drawbacks include substantial upfront investment in digital
infrastructure and challenges in integrating new systems with legacy platforms. Adoption
is uncertain, particularly if challengers outpace banks in agility. Innovation may also
cannibalise existing high-margin FX revenues, causing short-term earnings pressure.
Moreover, compliance requirements—especially anti-money-laundering controls for P2P
,services—pose regulatory risks, and a poorly performing launch could damage brand
credibility.
Partnerships or Acquisitions of Disruptor Banks
Benefits: Strategic alliances or acquisitions provide rapid access to innovative
technology, customer bases, and technical expertise. Integration of disruptors’ P2P
solutions could create hybrid offerings, accelerating scalability and enhancing customer
trust through the established bank’s reputation. This model leverages synergies: while
disruptors benefit from volume expansion, incumbents offset shrinking margins through
higher throughput and cross-service bundling.
Risks: Integration challenges are common, including cultural misalignment, operational
disruption, or key talent attrition. High acquisition costs may not yield proportional
returns if disruptors’ business models fail to scale sustainably. Additionally, concentrated
markets like South Africa are prone to antitrust scrutiny, potentially blocking deals.
Partnerships that fail expose incumbents to reputational risks, especially if disruptors
face data security breaches or regulatory issues.
Competitive Pricing Adjustments (Narrowing Buy–Sell Spreads)
Benefits: Reducing spreads enhances competitiveness by appealing to price-sensitive
travellers. Higher transaction volumes, supported by economies of scale, could partly
offset thinner margins. Bundling with complementary services (e.g., travel insurance or
concierge services) further strengthens customer retention. In highly profitable markets,
this approach positions banks as customer-focused, potentially discouraging challenger
entry.
Risks: Lower spreads immediately erode profit margins, with no guarantee that
volumes will increase sufficiently to compensate. The strategy risks signalling
vulnerability, encouraging further challenger activity. Crucially, this defensive approach
lacks long-term strategic depth, as it does not address the structural shift towards digital
convenience. Over time, failure to innovate risks obsolescence.
, Lobbying for Regulatory Barriers
Benefits: Incumbents can leverage established political influence to slow challenger
growth by lobbying for stricter licensing requirements, capital adequacy standards, or
consumer protection rules. Such measures may preserve profits temporarily while
banks adapt internally. Regulation can also enhance systemic stability, indirectly
benefiting consumers.
Risks: Regulatory capture strategies can backfire, provoking consumer backlash and
reputational damage by portraying incumbents as anti-competitive. Ethical concerns or
breaches in lobbying conduct risk fines or sanctions. Furthermore, even if successful,
regulatory barriers do not address underlying market changes. Should rules later relax,
challengers may re-emerge with greater legitimacy and public support.
Overall Evaluation: A balanced strategy that combines internal innovation with
selective partnerships offers the most sustainable pathway. While lobbying and pricing
adjustments may provide temporary relief, long-term competitiveness will depend on
incumbents’ capacity to innovate and integrate digital-first solutions without undermining
customer trust.
