What’s a white-label broker? First, let’s define the meaning of white-label in common usage, and then in the Forex context.
In a regular sense, white-label is a popular format of a partnership where one company produces goods or services, and another one sells them under its brand.
A white label in Forex is an affiliate program, according to which a solution and infrastructure provider transfers it on a paid basis to the founder of a new brokerage company.
White Label Provider in Forex
Thus, a solution and infrastructure provider is called white-label provider. The white-label provider allows a new brokerage company to enter the international financial market under its own brand or to expand the range of provided services for the account of a prime broker. The solution provider could be a developer as well as an agent between the developer and brokers.
The white-label provider supplies the MT4 and MT5 server segment, software, mechanism for conducting transactions on the external market, reliable backup system, building of a global access server network, etc.
The white-label provider deals with all technical infrastructure, resolves issues and provides:
- Access and opportunity to use the trading platform;
- Customer support on all matters;
- Management system;
- Usage of plugins and tools for client engagement, risk management, payment integration, effective liquidity management, etc.
There can be different scenarios of partnership, but the broker has to pay for customization and rebranding in all of them.
A white-label broker is an established company that pays commission to the white-label provider for using its infrastructure and licenses. If there are technical problems or if new solutions need to be implemented, the white-label broker appeals to the white-label provider.
A lot of traders deal with the white-label Forex brokers without even knowing it.
Three Ways White Label Broker Work – A-Book, B-book and Mixed One
A-book is a type of execution of client trades. Here the broker is an intermediary, and he conducts client transactions though a prime broker or a liquidity provider. As a result, the broker turns a profit by levying his customers commissions or by increasing the spread. There are no conflicts of interests, because the broker earns money whether a trader has taken profit or not.
B-book is a type of execution of client trades, too. Here the forex broker himself is a counterparty for his clients and executes client trades at real quotes received from banks and liquidity providers.
Mixed or hybrid model is considered the most optimal execution type for average brokers. It combines A-book and B-book, so the broker can bring the profitable traders to the real market, and processes the others’ transactions internally. At the same time, the mixed model excludes serious deposit requirements and major non-trading risks.
All the above-described models have their own pros and cons, depending on the goals and objectives of white-label brokers.
The Pros of White-label Brokers
- Quick start without significant costs in comparison with starting a company from scratch. A broker may spend significant amounts on technical infrastructure, Forex license and Metatrader 4 or Metatrader 5 trading platform licenses. Working with white-label, he saves his money and gets turnkey solutions.
- Flexible cooperation terms and the chance to take advantage of the latest technologies to meet client demand. The broker doesn’t need to spend time on developing new software or scripts, he can just use the turnkey solution. He can choose the tools and services from the range offered by the white-label provider. Or the broker can order a custom solution from the white-label provider.
- Ability to build your own brand. The white-label broker is allowed to create his own brand and develop it without mentioning the white-label provider.
- No proprietary technical support required. The broker can forget about renting servers, trading platform configurations and other technical issues.
The Cons of White-label Brokers
- Commission must be paid in any case. At the same time the broker has to pay for installation and configuration of his server side. Regardless of whether the broker has started to earn money or his expenses have not been repaid yet, he must pay.
- Difficulties with promoting the brand with a common product. In order to stand out in the market, the broker has to create something special besides the technical equipment.
- Likelihood of dependence on the platform owner. The broker may find himself in a situation when the solution provider overprices his services, or doesn’t want to update or maintain the technical equipment he provides, or even decides to close his business.
- A white-label broker does not have full flexibility in choosing the tools that they would like to implement and introduce to their clients in case such tools require a direct installation on the white-label provider’s platform. Certain white-label providers do not authorize the usage of third party risk management tools, which results in a limited number of options for white-label brokers.
The Legal Question
Depending on the country, there could be strict regulations and rules that the brokers should abide by. Thus, the brokers have to make wise decisions in choosing their white-label provider and remembering the jurisdiction aligned with it.
For example, in the USA new entrants to the market who are just starting out as a white label brokerage cannot fulfill certain requirements for brokerage work . Meanwhile, Germany’s Federal Financial Supervisory Authority (BaFin) stated that 48% of European brokers are licensed in Cyprus, and only 29% have local German licenses. The fact underlines a greater loyalty to Cyprus brokers.
Belarus is an interesting example among the ex-USSR countries. There is a register of forex companies that ensures the reliability and transparency of operations carried out under the supervision of the regulator, the National Bank of the Republic of Belarus.