What is Peer-to-Peer Currency Exchange

23-February-2017 by Audrey Van Houten


Money is one of the most important inventions created by human society (remember the famous phrase “Show me the money” in Jerry Maguire?). It facilitates trade, employment, and other commercial activities. In fact, every advanced civilization came up with the concept of money. Today, almost all (if not all) countries have their own version of it.


“Show me the MONEY!” by Rod Tidwell in Jerry Maguire (1996)


In time, merchants and travelers realize they need to change to the local currency every time they cross borders. They needed a safe way to do it, so they relied on banks and brokers. However, Banks and Brokers typically charge a high cost for providing such currency exchange services.  They usually earn their profits from service fees and taking a spread on the exchange rate (spread is the difference between the rates charged by banks/ brokers and the exchange rates quoted in the international FX market).  At times, this spread could be as large as 8% or more depending on currencies.


Online money exchange services offer better rates

Fast forward to today, the internet has made the world smaller. International trade is faster. Business transactions are now larger and that made current bank rates expensive.  Information flow is also much faster and widespread now, making real-time exchange rates information very transparent to everyone. Therefore, people are now very savvy when it comes to currency exchange and are always on the lookout for the best rates for currency exchange to save money. A penny saved is a penny earned.

The internet has also allowed for the possibility of Peer-to-Peer (“P2P”) commerce. Traditionally, P2P commerce is being done with products, hobby items, and services. But P2P has now expanded to financial services as well and has given rise to Fintech startups like MoolahGo (www.moolahgo.com) which allow ordinary people to buy and sell different currencies online. The benefits besides convenience are attractive exchange rates and security as these startups are licensed and regulated by the central bank.


Savings, Convenience and Security with online exchanges

Users looking to exchange their money for another currency can use these online services to do so. The online exchange acts like an escrow agent and a clearinghouse, providing ease of mind and security to users knowing that the monies that they have paid will always be safe, and equally important, the foreign currencies that they will receive are legit. It turns the currency exchange system from a sellers’ market to a buyers’ market.


The Mechanics of Online P2P Currency Exchanges

Security is a major priority for these P2P currency exchanges to ensure users have peace of mind interacting on their platform. For example, MoolahGo has gone the extra step to employ bank-standard 2-Factor-Authentication (2FA) as well as Email Verification providing added security for their users.

People looking to use P2P currency exchanges can sign up on websites offering those services. The online sign-up is usually free of charge, very prompt and easy using an email or mobile (just a few clicks). Once registered, they are then required to a complete an identity verification process. It is to ensure the security for all users involved and required by law.

To transact, P2P currency exchange sites usually operate based on the Pre-Funding or the Non Pre-Funding model. Under the pre-funding model, users first need to fund their accounts using a credit card, debit card, PayPal, bank transfer, or other payment methods supported in their country. The funds will then reflect on their accounts and they can then start buying other currencies.  Conversely, in a non-pre funding approach, users make payments only at the point of each transaction.

P2P currency exchange sites also try to differentiate amongst themselves by varying their technologies and platforms. The most common technologies accept instructions from their users and perform the matching with other transactions at the back-end. Other sites provide further transparency to their users by giving them the flexibility to select which peers they would like to transact with. To achieve this, such sites would need to provide a marketplace-type platform for users to list their transaction requests. However, such platforms are uncommon in Asia.  MoolahGo currently appears to be the only one to provide such a platform in South East Asia.

Some advanced sites would even allow their users to set their own exchange rates. This concept radically shifts the power into the hands of users. For instance, MoolahGo provides their users to select the Market Rate or their own exchange rates.


Example of a P2P Currency Exchange process

Using MoolahGo’s platform as an example, below is a high-level description of how a typical P2P currency exchange works.

Michael is a Singaporean who is going on a tour with his family to Europe. He submits his Euro currency needs based on market exchange rate on the P2P currency exchange site and makes a payment.

Helga has just returned from Spain and has excess Euros which she would like to convert back to Singapore Dollars.  She goes online to the P2P currency exchange site and finds Michael's need for Euros and accepts the transaction. Michael gets a notification and confirms Helga's request. Both users then make payments in their respective currencies to the P2P currency exchange site. After verifications by the site, the currencies are then handed out to the respective users via their preferred receiving option which may include bank deposit, cash pick-up or delivery.  And because they have transacted using the market exchange rate, Michael and Helga now enjoy significant savings on the exchange rate.

P2P platforms are a convenient online money changer and customers no longer need to pay high costs to have their currency exchanged.

Below is an example of a P2P Currency Exchange platform from MoolahGo.