Monday, 6 February 2017

An Idea for a Mobile Wallet Carry Trade


Many years back (and probably even today) there was an idea played in the investment market to make money which was popularly known as the "Yen Carry Trade". To put it simply one would borrow in Yen from Japanese markets at ridiculously low interest rates, convert it to US Dollars and invest in US Bonds at substantially higher interest rates thereby pocketing the difference as the profit. The added bonus to this would be the US Dollar going up thereby fetching you more gains with the downside being the Yen appreciating against the US Dollar as well as lowering of interest rates.

Coming to recent times, there has been large scale promotion of digital or mobile wallets. These are wallets which mostly reside in your mobile phone and provide ease in transferring funds amongst individuals, businesses and bill payments. One can have money in one's mobile wallet by transferring funds from one's bank account, credit card or receiving funds from another individual with a mobile wallet from the same service provider. An important feature if one were to convert this digital money in to real money is transfer from your mobile wallet to your own bank account. This is where an idea for generating cheap capital has come to germinate. Theoretically it sounds good but could well be a bubble.

This idea hovers around the fact that one can load one's mobile wallet via one's own credit card as well as transfer funds available in the mobile wallet to one's own bank account.
In a mobile wallet, one can transact with an upper limit of Rs. 20,000 per month without need for documentation. There is also single transaction limit of Rs. 5000/- as well as an overall daily transaction limit. With appropriate documentation you can enhance your monthly limit to Rs. 100, 000/- subject to the transaction limits. If one needs to empty ones wallet, one has to transfer the money to one's own bank account.

For the purposes of our idea we will stick to a zero documentation limit of Rs. 20,000/- per month.
For this idea to work the money from your mobile wallet needs to be deployed for money making purposes. To the best of my knowledge, you cannot trade on the stock/commodity exchange using your credit card. If one were to do a cash withdrawal on your credit card, there would be an immediate charge of up to Rs. 300/- per withdrawal and a monthly finance charge of about 2 % or higher. So for a Rs. 20,000/- withdrawal you would pay a sum of Rs. 300/- plus Rs. 400/- which equals a sum of Rs. 700/- for a 30 day period or Rs. 900/- for a 45 day period. Given the current times cash withdrawal and then deposit is not a wise thing and not advisable.

If you were to load your mobile wallet via a credit card it costs you nothing. A transfer to your bank account may cost you anything from nothing to up to 3 % depending upon your service provider. Assuming it is 3 %, it will cost you Rs. 600/- for transfer of Rs. 20,000/- to your bank account. Now please note that credit cards usually have a credit period of 45 days to 55 days. Assuming it’s a 45 day period, you would have to pay your credit card company within 45 days of loading your mobile wallet using your credit card.

So on day one of your credit card cycle you load your mobile wallet with Rs. 20,000/-. The same day you transfer this money to your bank account. Your bank account is linked to your stock/commodity trading account with your broker. You transfer this money to your broker to be used as margin for trading. If You are trading in  stocks your margin may be as high as 50 % which would give you a trading limit of Rs. 40,000/- and you avoid delivery stocks. In commodities or currencies the margins are usually around 5 % and you avoid trading in grains and stick to only metals. This would give you a trading limit of up to Rs. 400, 000/-. So in a 45 day period (remember you have to pay back your credit card company within this period) there are usually around 25 trading days on the lower side. If one were to trade on the stock markets without delivery with adequate risk protection strategies and make an average of about 1 % daily net of associated trading costs, you would make about Rs. 400/- daily which would mean about Rs. 10,000/- (400*25) within the 45 day cycle. You reduce the transfer cost of Rs. 600/- and you make Rs. 9400/- and repay your card bill of Rs. 20, 000/-. In the currency or commodity market you would make about Rs. 4000/- daily which would translate into Rs. 100,000/- (4000*25) within the 45 day cycle. You reduce the transfer cost of Rs. 600/- and you make Rs. 99400/- and repay your credit card bill of Rs. 20,000/-. On an annualized basis you would make anywhere between Rs. 75,200/- to 795,200/- depending which markets you trade in.

Now again the gains are on the limits based on documentation free single mobile wallet. If you were to submit full documentation, you can get my mobile wallet limits enhanced to Rs. 100, 000/- . Thus on the above calculations your annual gains could be anywhere between Rs. 376, 000/- to Rs. 39, 76, 000/-. This is only on a single mobile wallet. Your gains increase exponentially if you were to use multiple mobile wallets.

The above rosy illustration is based on ideal conditions, adequate risk protection, stop losses and regulations permitting. You are also prudent to pay your card issuer on time and not incur late payment charges. You also do not display too much greed.

The downside is that transfer to your bank account from your mobile wallet may not happen immediately and may take up to 7 working days. Your bets may go wrong and you may lose your margin and more. You may push for late payments or minimum payments on your credit card bill and incur additional costs thereby wiping off gains. There are per transaction limits and a daily transaction limit as well. So your transfer from mobile wallet to your bank account may be spread over some days. You will end up as a credit card defaulter.


The above is just a thought being said aloud. It has not been tested. I don't know whether it will work. I don't know if the system allows this. I don't know if this attracts any regulatory action. I don't know if there would be any additional costs. But like I said at the start, it's an idea which may or may not work.

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