Competing in a Fragmented Money Changers’ Industry

Fragmented industries are an important structural environment in which many businesses compete yet no firm in this particular industry has any substantial market share to strongly influence the industry outcome. This is because fragmented industries often do not receive the amount of attention they deserve especially when it is difficult to collect information from organizations belonging to this industry. In the money-changing industry, it is because most individuals frequently have a set of buying needs for different currencies that requires support from services that operate as different entities, resulting in the fragmentation money-changing firms are facing today.

We will be examining the effect of market fragmentation in the money changers industry in the context of Singapore and how a number of competitive forces are able to affect this fragmented industry.

Industry’s Dominant Economic Traits

As a money changer needs to buy currencies of lesser value and sell the same set of currencies for a higher value in order to profit from this business, it is critical that they anticipate market trends and future events that are likely to occur in order to predict the trend of currency rise and fall. Such expertise is accumulative and the greater the expertise and adaptability, the more profitable a money changer can be. One wrong hedging decision may also cost money changers to lose huge sums of money, thereby highlighting the importance of how a simple money-changing business can also play a part in making strategic decisions every day, every hour or even every minute.

In a highly productive and commercial economy like Singapore, it is inevitable that we rely heavily on international trade hence more jobs have to be created in order to provide goods and services to the high influx of investors and tourists. As banks generally offer lower exchange rates, consumers have to turn to existing small autonomous individual money-changing firms in the marketplace for a faster and less costly trade for currencies. Besides foreign immigrants, tourists or expatriates, money-changing firms also rely on other sources of revenue to increase their profitability such as offering informal money transfer systems due to its simplicity, efficiency, reliability and low cost as compared to banks. As long as it requires investors and even tourists to exchange for currencies regularly, there has been an increase in money-changing firms over the past decade to cater to the currency demand of these individuals, and to profit from them.

When there began to arise too many dispersed players in the short run to vie for the same market share, fragmentation becomes inevitable.

Immediate Industry & Competitive Environment

It is essential for managers to diagnose a company’s internal and external environment if they want to succeed in crafting a strategy that fits excellently with the company’s situation. Sudden changes in market value are important considerations in international investing, hence changes in foreign exchange rates will affect all international investments. Analysis of uncontrollable macroeconomic factors allows an organization to develop a strategy to maximize opportunities while nullifying threats. Below is the PESTLE analysis that would affect the money changers industry in Singapore.

PESTLE analysis for money changers

PESTLE analysis of the Money Changers Industry

As money changers are unable to control the macroeconomic forces, it is more important to identify their competitive forces so they can focus on the the critical strengths and weakness of the firm, shift the positioning of the firm in the industry if needed and identify areas where strategic changes can harvest the greatest payoff yet, emphasize on entrenching on their opportunities and nullifying the threats. The SWOT analysis illustrated below can allow money changers to leverage on their strengths to mitigate the effects of the competitive forces, turning the economic situation into a favorable position for them to overcome fragmentation.

SWOT analysis
SWOT analysis of the Money Changers Industry

The money-changing industry is so fragmented today because of imperfect information that all buyers/customers have which leads to a loss of mutually beneficial trades. The inability to communicate and collect information quickly, cheaply and accurately about the best exchange rates from countless of competitors out there causes buyers to be at the losing end. Below are five competitive forces which forms the primary reasons why more money changers enter the industry, leading to more market fragmentation.

1. Government Regulations

Government regulations never fail to play an important role in becoming the most important barriers to entry in fragmented industries. Examples of governmental regulations in the money-changing industry are prevention of market monopolies and exploitation of economies of scale and economies of scope advantages. Although all money-changing firms are currently under the care of Consumer Association of Singapore (CASE), they still have to work closely with MAS to ensure a cost-efficient and effective distribution of the Singapore currency as well as the availability of the currency to meet public demand. Briesemeister and Fisher (2002) have suggested that successive presidents encourage a more relaxed approach rather than a tight enforcement as this may allow industries to better capture greater economies of scales and expand on a regional or global basis.

2. Customers

An increase in tourists, foreign immigrants or investors in Singapore would also see a rise in more revenue leading to more competitors coming into the market and fragmenting the market even further. It should be taken into account that the customer competitive force differs from that of the bargaining power of buyer where the latter implies that buyers have sufficient bargaining leverage to influence terms of sale in their favor. Porter had asserted that there is likely to be less power advantage over buyers and suppliers because buyers are equally fragmented themselves hence the need for fragmented suppliers to meet these needs. The former on the other hand indicates that as each customer has different needs to be met, a consolidator looking to exploit economies of scale must first recognize these issues early and understand why money-changing firms have the high and low demands for different currencies before devising a strategic plan for consolidation. Through alliance, power can be captivated in demand as opposed to supply.

3. Costs

We know that the cost of entering this fragmented industry is likely to be so low that no money changers are able to adjust the range of the exchange rates among one another, and this might cause them to possibly break-even with the revenue they earn. Moreover, the inventory cost of holding different currencies in large amounts may be high resulting in even lower profit margins. Hence, these money-changing firms need to be cost competitive to find a low cost operation strategy in order to increase their profit margin. That said, it is however one of the most difficult tasks to do especially with the high rental costs and rising inflation in Singapore. These cost factors may very well determine the survival of any money-changing firm if they were to continue operating on an independent basis. This is why costs plays an important factor in why money changers have been coming in and out of the industry so frequent that they are unable to carve a brand for themselves to have standardized exchange rates.

4. Technology

Other factors include the advancement of technology that leads to greater globalization today and fragmentation is said to be the result of globalization. As globalization strengthens, so is fragmentation which is bound to change the currency exchange landscape. International trade and foreign direct investments expand more rapidly than ever resulting in an extreme global currency turnover situation. To mitigate the situation, Google Wallet and Mastercard’s Paypass have been making inroads into the market for mobile wallets where smart phones can be easily used to tap against a compatible reader to transfer payments. While this would certainly affect the businesses of all money changers as consumers may no longer need to hold hard cash for their transactions, this may however speed up the currency exchange process when all customers need to do is to tap and transfer payment to receive hard cash of another currency.

5. Geographical Force

Although there may be high potential growth in the money-changing industry, this growth can only be observable in the long run. In the short run however, several money-changing firms are entering the same industry to vie for an existing market share, hence it ultimately depends on where these money changers locate themselves to capitalize on the surrounding tourist-populated areas in order to increase their revenue and profits. As buyers’ behavior are often geographically determined especially in a small country like Singapore, there are bound to be many money-changing firms setup in one densely populated location. If they are positioned too close to one another, their exchange rates may become so competitive that it allows customers to make comparison easily where they will then approach the one with the best perceived rates. If they are located in areas which are less populated, then they may not bring in enough revenue to make a profit as customers would have to incur high transportation costs to travel from one place to another.

Position of Competitors

Money-changing firms are often “stuck” because of the lack of resources and skills to broaden their business on a regional or global basis. Despite banks charging higher transaction fees, they have widely used financial arrangements that would always have an advantage over small independent money-changing firms – the forward market and the options contract.

In the forward market, exporters are allowed to exchange two currencies on a future date at an agreed rate, allowing both parties to cover themselves in the event of unexpected fluctuations. In the options contract, exporters agree to buy foreign exchange on any date between a set period, at a rate set conjointly with the bank. Hence, companies generally use options when they need to cover their exposure over a very long period ranging from 6 months to one year. This however is impossible to achieve for any small scale money-changing firm as the relationship between money changers and their customers are more of a one-off transaction nature, where customers cannot choose their forward rates to trade their currencies. This greatly puts them at a disadvantage as large organizations would often approach banks to trade their currencies which are frequently transacted in large sums, allowing banks to achieve economies of scale and transaction costs are lowered on a wider scale. When banks trade at a higher exchange rate and even charge a service fee for each exchange, their profit margin increases with every exchange. Such services is likely to impact the money-changing business as well.

Overcoming Fragmentation

When competitive forces become increasingly strong, unless strategic tuning are made, money-changing firms in a traditional fragmented setting may face greater devastating rivalry. Overcoming fragmentation is said to be a strategic opportunity as the payoff for integration of the money-changing industry is considerably high especially when the cost of entry are relatively low. Dealing with fragmentation also implies that there is no one ultimate method to compete most effectively, hence most of the solutions proposed are either directed at the nature of the fragmentation or to neutralize the intensive competitive forces that exist in the market. As imperfect information exist in a fragmented market, a consolidation can take into account all the available information to determine market outcomes and can exchange currencies on a collective basis and have a significant impact on its buying and selling power.

Merger & Acquisition

Here, the consolidator must identify ways to create and sustain its competitive advantage through economies of scale and scope to lower costs so as to increase profits. Rather than increasing its operations at one location, all it takes is for one money-changing firm to be listed so it can issue shares to raise funds for acquisition of other money-changing firms where these small individual firms are still allowed to keep its own name and operate at low-cost facilities at various prime locations. Since most of the money-changing firms are land-based, choice of location is important. For example, the acquisition of a few money-changing firms in Little India to cater to the Indians, Chinatown to the Chinese and so forth would allow these money-changing firms to create a niche where they are specialized in serving certain geographic areas. An example would be to increase the amount of Indian Rupees (INR) to money changers located in Little India and reduce other currencies that are less traded for. This allows the parent company to then transfer currencies that are less demanded to other locations which has higher demand in order to reduce high inventory costs. Upon these, the parent company can then franchise to new entrants who wants to capitalize on the existing opportunities that have been identified in the SWOT analysis above. However, these small autonomous firms would have to follow the exchange rates, type of processes and standardized operations procedure from the parent company so it can allow for a tighter and more centralized monitoring and control where no individual firm is allowed to trade currencies under the table. This form of centralization allows the firm to recognize the reasons of fragmentation yet adds a degree of efficiency to the fashion in which the industry operates.

Furthermore, the parent company would also be able to exchange large sums of currencies, strengthen its bargaining power yet lower transaction costs and increase profits collectively across all the branches under its group. It can also recognize industry trends early to make forecasts and predictions of the time they should exchange for the currencies in order to increase their profit margin. Through extensive marketing like word-of-mouth, these money-changing firms can not only create economies of scale leading to an industry union, but also be able to standardize diverse market needs when buyers/customers see their rates as of a better value as compared to competitors.

Or Strategic Alliance?

Strategic alliances or joint partnerships can also complement their own strategic objectives and strengthen their competitiveness in the market. Such forward integration allows them to compensate for the undependable exchange rates that numerous island-wide money-changing firms rely on and mitigates overall exchange rate risks. This is mainly because strategic alliances allow two or more separate entities to share profits, resources, risks, control and are mutually dependent on one another. Through strategic alliance, firms can now master new technologies and build new expertise faster than what would be possible to achieve individually, allowing them to increase economies of scale and decrease costs. Furthermore, it enhances a firm’s competitiveness which may raise entry barriers especially when resources are now pooled together. With pooled resources, firms can now expand their opportunities to enter neighboring markets, kicking start the process of building a regional presence to gain valuable skills and capabilities before going global. With good partners, it can bring about accumulated benefits to achieve global and industry leadership.

Of course, the capabilities of an alliance to preserve ultimately depends on how well they are able to work with one another and adapt quickly to the uncontrollable forces that may change the landscape of competition. To survive in a fragmented industry, money changers can make use of technology or value-added differentiation in order to market their currencies selectively to a particular niche with a highly customized marketing program. However, this may be one of the most difficult methods to identify specialization and to customize the products especially when there could be many other competitors who are trying to gain their respective niche as well.


Any organization that attempts to gain competitive advantage by making the first move is likely to expose itself to first-mover competitive disadvantages. With numerous firms under the same umbrella, there may also be a lack of strategic discipline which is always needed for effective rivalry in fragmented industries. This may maximize the vulnerability of the consolidator to the competitive forces, which threatens its survival further.

Although it is good to centralize these dispersed money-changing firms to standardize its operations and increase its ability to adapt to instabilities in industry trends, over-centralization may instead slow down response time. This is critical as it may disappoint consumers who have ever-changing expectations. A merger is also likely to be deemed as a new learning curve, subsidiaries may require a long period of time to adapt to the parent’s company way of operations where they may be unwilling to share their expertise. Furthermore, it is important to understand all aspects of the operation to avoid any difficulties. This is especially challenging if the subsidiaries were not taken care of after merging. Without cooperation from these firms, centralization may increase diseconomies of scale instead. It is also hard to determine how much of their operations should be centralized and how much should not be. On the other hand, reasons for failure of strategic alliances are the inability of partners to work well together where they may anticipate and forecast industry trends differently and may want to focus on trading on a particular currency, causing diverging priorities.

Even though these money-changing firms may operate in a fragmented industry, no single firm can operate in the same manner. They have to review its strengths and weaknesses to match to future opportunities that exist and also possibly nullify its threats. While a M&A or a strategic alliance may be the answer to overcoming fragmentation in order to seek growth, it remains unknown whether it can remain profitable and feasible. After all, the money-changing industry may not be fragmented for nothing due to historical reasons which are not easily overcome overnight especially with the above limitations.

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