The business of financial services adds up for Fexco

Starting out as a one-man foreign exchange service in the 1980s , Brian McCarthy’s business now handles an estimated $5 billion a year

When Brian McCarthy arrived in Killorglin on the second day of Puck Fair in August 1974, it’s likely that no one, including himself, would have predicted that the new assistant manager of the town’s AIB branch was destined to lead a multinational financial services company.

Now, almost 39 years later, the Kerry town is home to the headquarters of Fexco, a foreign exchange and financial transactions processor which handles an estimated $5 billion a year, has 1,700 staff and tentacles that reach to the US on one side of the globe and New Zealand on the other.

McCarthy started this business from scratch in 1981, providing foreign exchange services to tourists and local people who wanted to convert sterling and dollars into Irish punts. Fexco was born out of the opportunity that presented itself when the Republic left sterling and entered the old European Exchange Rate Mechanism, the distant forerunner of monetary union.

The split with the British pound meant that large numbers of tourists and local people would need a convenient means of changing cash, so he left the bank and began offering the service himself. “It had,” he recalls, “to make money straight away.” Otherwise, the former assistant bank manager would have no way of supporting himself or his family.

Fexco made a profit in its first week, and has continued in that vein ever since. The early 1980s may not have looked like the best time to start any business, but for McCarthy and Fexco, it turned out to be opportune. Three years after he established the company, the Government introduced tax-free shopping for tourists from outside the EU, or EC as it was then.

This meant that visitors could reclaim Vat on purchases made in the Republic. McCarthy quickly cottoned on to what was another opportunity, and began offering tourists a Vat reclaim service. Most of the customers were from the US. The company soon discovered that the banks across the pond could not – or would not – convert Irish punt cheques, so the company had to start producing its own dollar cheques.

This opened the door to international expansion. Fexco Tax-Free Shopping was quickly extended to Scotland, where the company thought the idea would work as well as it did at home. From there it grew to cover the rest of the UK and on to Europe.

In 1989, Fexco joined forces with An Post to run the State’s prize bond scheme, which it is still doing to this day. The deal meant that the company had to bring 11 million documents back to Kerry, where the information was inputted into its computer system.

Luckily, Fexco had recently spent Ir£2 million on a new system, which had far more capacity than was needed for its existing operations. In a recent – and rare – speech, McCarthy made light of what would have been a big investment in technology at the time, saying that his business had no real option, as the choices boiled down to something that either had too little capacity or too much.

However, the reality is that Fexco has always made a point of investing heavily in its systems. “It’s the key to all the things that we do here – technology,” McCarthy says.

That key unlocked a series of opportunities. Fexco continued growing through the 1990s, forming alliances with the likes of Western Union and entering both new businesses and territories. It was one of the pioneers of direct currency conversion, the system that allows shops to offer customers the option of paying in more than one currency.

Payment transactions

In 2006, 25 years after McCarthy went out on his own, Fexco Holdings had revenues approaching €200 million and net assets of €100 million. By 2009, when radical revaluations were punching holes in most balance sheets, Fexco’s net assets had almost doubled.

Along with foreign currency services, it has an asset finance and plant hire business, handles a wide range of payment transactions for businesses and consumers, owns a majority share in Goodbody Stockbrokers, runs a tourist booking service and offers credit management and Vat refunds to businesses. In short, the chances are that the company has handled transactions involving thousands of people reading this newspaper today.

Fundamentally, the business consists of three main divisions: global corporate payments, which includes its dynamic currency conversion, business Vat refunds and asset finance operations; global consumer payments, which includes the original bureaux de change, consumer Vat refunds and stockbroking; and business services, which encompasses the prize bond company, call centres and payment processing. Fexco has operations in Ireland, Britain, the US, Middle East, China, Hong Kong, the Antipodes and Pacific islands.

It handles transactions worth an estimated $5 billion a year. Its revenues are essentially commission and agency payments from these activities. The business is profitable, although McCarthy will not say just how profitable.

He is executive chairman, and holds a 39 per cent stake in the business. The directors, including managing director Gavin O’Neill, hold 32 per cent, the staff 4 per cent and US giant First Data Corporation 25 per cent.

‘Doing okay’

Not everything has gone smoothly. In 2006, the company bought a majority stake Goodbody Stockbrokers from its owner, AIB, in a deal that saw the broker’s own management take a 25 per cent stake in the business. However, the markets, and particularly Irish stocks, began to slide in late 2007, and everything went dramatically pear-shaped in 2008. The business now is “doing okay”, according to McCarthy.

More recently, it has been dogged by some high profile departures. In August, portfolio managers Richard Flood and Daniel Macauley and pensions manager Suzanne Cashin left to join rival Tilman Brewin Dolphin, to which Goodbody had been supplying some support services.

The two firms ended up taking parallel actions against each other in the High Court, where it was claimed that Tilman paid the three brokers €700,000 in “hello money” to lure them out of Goodbody, which in turn wanted to prevent them from revealing confidential client information to their new employer. The three pledged in court not do so.

The Fexco chairman seems sanguine about the affair. He maintains that all stockbrokers encounter problems like this. “They all would have experience of people being unhappy,” he says, adding that it’s a feature of the industry that dates back to the last decade, when brokers were well rewarded. “We try to accommodate people where we can,” he points out.

Goodbody’s chief executive, Roy Barrett, is on the Fexco board, ensuring that there is close contact between the two businesses. From time to time, there are rumours that Fexco is looking at selling its share, but no sooner do they surface than they are scotched.

Career bankers

McCarthy is from the Magazine Road area of Cork city and began his career in 1963 at the tender age of 17, when he joined the old Munster and Leinster Bank. The bank, based on South Mall in the city’s centre, had some of Cork’s best-known business names on its shareholders’ register, including the Punches and the Murphys.

Back then, McCarthy recalls, the Central Bank kept a tight rein on the sector as a whole, and watched what the individual institutions under its supervision did very carefully. “Whatever the business, they had to get it cleared with the Central Bank,” he says.

At the same time, those running the organisation itself took their own positions particularly seriously. “They were career bankers, their attitude was that they had to protect the bank and its assets.

“But given that that requirement was paramount individual branch managers had a lot of control because they knew the clients.”

In fact, he says, it was the manager’s job to know both their clients and their communities. However, when the Munster Leinster merged with the Royal and Provincial banks to form AIB, the country’s biggest finance institution, it ushered in a new era.

“During that time, the bank became centralised, which was a huge change,” McCarthy says. “The whole banking system was organised from a central point. Before that, there was a lot more emphasis on control by branch managers.”

The Fexco founder brought his own direct experience of using technology to run a large organisation along with him. He emphasises the importance of systems in his own business.

A key challenge for the Irish company is ensuring that it complies with the rules laid down across multiple jurisdictions to anticipate risks such as money laundering and fraud.

Given that he’s seen “both sides” of banking, the prudent, old-fashioned, approach and the more modern, and, as it turned out, not-so-prudent version, how does he think that the financial system – and the economy – can be revived?

“The first thing that has to happen is that the banking system has to be stabilised,” he says. Without that, he warns, it will be impossible for businesses to get access to normal credit, or for economic growth to get any kind of momentum. The responsibility rests with the State.

“It’s up to the Government really to ensure that we put the banks on some kind of viable footing,” he argues, although he concedes that it is hard to see what else it can actually do with the Republic’s ailing financial institutions.

He believes that the Government also has a central role to play in making the Republic more competitive by cutting its own costs, which, he argues, contribute to making the country an expensive place to do business.

“We have to bring down our costs. The cost of doing business in this country is too high,” he says. McCarthy believes that this is a by-product of the fact that the State is simply too expensive to run.

“That’s very difficult as many different people have a hand in it. It requires very strong leadership.”

Customer support

Fexco and a number of other companies, South Western, Abtran and Rigney Dolphin, all of whom operate call centres and back-office support services, themselves came up with one idea for saving the State money: outsourcing routine processes and management to the private sector. They believed that this could cut public service costs by 30 per cent.

They have made a few inroads into this. Fexco provides customer support for State energy group Bord Gáis and is considered a likely candidate for the contact to the same for Irish Water.

In the meantime, it is focusing on transactions, the job it does best. That industry is continuing to develop, and, it is no surprise that the latest driver is the smart phone.

McCarthy points out that five years ago few consumers would have predicted the impact that these devices would have. “They allow more people to carry out more transactions,” he says.

So what is Fexco doing about all this? “We are looking at how people will be doing things in five to 10 years’ time. The trick is to be ahead of everyone else . . . if you can.”

CV Brian McCarthy

Name: Brian McCarthy

Job:Executive chairman and founder of multinational currency exchange, transaction specialist and financial services group Fexco, which employs 1,700 people.

Family:Married with five adult children, one of whom, Denis, is a non-executive director of the group.

Interests:His family, the GAA and fishing.

Something you might expect: His background is in banking – he began his career with the old Munster and Leinster in Cork in the 1960s.

Something that might surprise:He owns a boat.