Broker to Trading

Once the trader has opened a live CFD trading account, they need to fund it to be able to trade. The way to do this is with a payment method via a payment provider, which results in the balance of the trading account being updated. A payment provider allows the trader to transfer between their accounts and the CFD provider, using a payment method. Some CFD providers offer a wider range than others, however there is typically a core group of payment providers. Payment providers offer convenience and safety when transferring money into and from a live trading account. Payment providers can have different characteristics which will be explored in this article. As well as established methods, there are also emerging payment provider technologies that may be utilised by CFD providers.

What is it that payment providers do?

Payment providers execute a series of processes to get funds credited from a trader's account to their live CFD trading account. When a trader initiates a transaction to send from within their account, the provider will authorize the transaction (including checking for sufficient funds), and then initiate what is called capture, which requests the movement of funds from the trader's account to their CFD account. These data transfers are typically performed via APIs and involve the use of encryption to safeguard the data being moved back and forth, as well as fraud detection and regulatory compliance.

After capture, the payment provider will take care of the clearing process which allows the funds to be settled into the provider's bank account and thence as a credit in the trader's trading account. It must be noted, that this is the process used by payment providers that integrate with the traditional finance system; as this article will explore, there are other ways to send money. However, using a payment provider accessing the traditional financial system via APIs offers security and reliability. What it may not offer is the widest flexibility.

Alternative systems: the blockchain

The blockchain is decentralised, thus payment processes have differences from those using the traditional centralised payment system. A key part of this process is the hashing of the transaction itself, which is then encrypted using the private key of the sender. Hashing is a process whereby data is processed via a hashing function to create a representation of the data, but which will significantly change if the underlying hashed data is altered in any way. This is different from authorization in payment processing, as it allows for a decentralised process. In essence, the sender can send data which the receiver can then check to see that it is exactly as sent. Thus it cuts out the authorization process whereby a third party has to verify the transaction from sender to recipient.

The blockchain itself is a system that allows this encrypted transaction data to be sent from the sender's wallet to the recipient's wallet. Thus, the process of capture is also removed. There is no need for a third party to initiate the process. It can be initiated by the sender and the blockchain will send it (i.e. it is peer-to-peer). And will is the correct sense, as it is a purely automated process, and in general, once initiated, transactions cannot be reversed (unlike in traditional payment systems), but this does not mean that all transactions are guaranteed to reach their destination. If you send crypto on its blockchain, either it will reach the destination or it will get stuck or it will fail because it was sent on the wrong blockchain or the destination wallet is incorrectly specified. This is to say, it will generally not fail because a third party interrupts it.

The blockchain itself operates as an autonomous system. It uses different mechanisms to enable movement across the blockchain. For example, Proof-Of-Work blockchains use miners to process transactions. Miners are disinterested, competing, third third-parties who add transactions to the blockchain by processing blocks of data, for a reward. So a transaction may get stuck if miners decide not to process it.

There are differing reasons why a miner may not process a transaction, however, there are many miners with different motivations. Thus the system itself has a redundancy built in such that even if a miner ignores a transaction, then others may well pick it up, and are incentivized to do so. In general, the way to avoid a stuck transaction is to make sure that sufficient transaction fees have been paid (as these are used to compensate miners and motivate them to process). However, this does point to a difference in reliability between traditional processing and blockchain processing.

The blockchain has a potential advantage in that the time taken to send is a function of the speed of the blockchain and its processes. Some blockchains are designed to operate at high speeds, some at lower and variable speeds. There can be a trade-off in terms of decentralisation to increase processing speeds. However, sending a transaction from wallet A to wallet B, no matter where these wallets are located, may be done in less than half an hour on major blockchains. This is because the data is sent across the internet and moves at the speed of these signals while the processing activity is also electronic, so it can be fast (but there are potential bottlenecks such as network congestion and processing delays). The ledger is stored on the blockchain, so there is no movement of crypto from wallet A to wallet B, rather a ledger is updated which is reflected in the balance in the wallet, in this sense miners act as part of the book-keeping process.

Cryptos do not have a real-world existence (despite their token images), they are simply electronic data (crypto does not have an id of any kind, but they do have an electronic signatures as transaction data). Those who process transactions are motivated to process them as quickly as possible, and what these processors are doing is altering electronic data (adding blocks of processed transactions to the blockchain). Because speed depends on the processing, in times of high use, both transaction fees and the time taken to process can increase.

Traditional payment processing may have a fee associated with it, but these are typically much more static than blockchain fees. These can update rapidly and are normally given as a range rather than the actual fee, which is not known until it is processed. This can be seen as another factor in terms of the relative reliability of the traditional system. All this said, some traditional methods can be very fast and some slower, so why the difference? TL;DR: It's all a matter of optimising processes on the mainstream financial system's banking backbone.

The speed of mainstream payment processing

The main payment methods for CFD providers are credit cards, bank transfers, and e-wallets. There can be quite a significant difference in the speed of these methods. The fastest tends to be credit/debit cards. These are fast because they are designed to be near instantaneous, hence why you can use a credit card at a POS terminal. The reason they are so quick is that the credit card system performs a series of rapid checks on a transaction using high-speed processing methods (e.g. data centers) and then guarantees the transfer. Thus, unlike the blockchain, the payment may not be authorised, if for example there are insufficient funds (although this is built into blockchain transfer as the crypto needs to be there in a wallet to send).

The actual settlement of funds from the trader's account takes longer and this can be seen in transaction reports, such that a transaction has not settled yet, even though the money has been received by the destination account. The money itself that appears in the trader's account before settlement is typically from working capital or some immediate pool of funds. The process may be slowed by the CFD providers themselves performing checks. So this guarantee, allied with centralised processing systems, is a way around the time taken by the system to move money, and it is one of the pillars of the financial system, concerning transactions.

This is a trust-based system, which can be contrasted with a trustless system (not requiring and using trust to operate), as utilised by the blockchain for example. A trust-based system can be defined broadly as one that requires trust to move across a network connecting the initiating node to the end node. Trust can include trust to send the funds (like a credit card), trust in accuracy maintained from node to node, and trust in the security of the transfer process.

The revolution of the blockchain is that it allows a near equivalent (but technologically different) transfer process but without trust, except in the sense that there is trust on the system. This said, highly centralised transfer systems with optimised systems can be extremely fast, very reliable, and very secure. As we have seen in other areas more directly related to trading, at the core of the credit card system are specialised high-speed data centers to allow for billions of transactions to be handled efficiently at scale - and allowing for near-instantaneous fulfillment. Decentralised systems are harder to optimise and scale this way. Though at the cost of some centralisation (and the localisation of trust), some blockchains can transfer extremely quickly and at low cost (for example Level 2 blockchains operating on the Ethereum mainnet, Ripple, or Stellar).

A bank transfer can take much longer and this is because it relies on the full application of the systems involved in moving money - in this case the money is not credited until it has completed the stages involved in sending it from the trader's bank account to the destination account. A bank transfer is not trustless, as it relies on the trust of the intermediaries involved in the chain from the sending account to the destination account. However, this process can also be contrasted with the blockchain as the blockchain does not require trust in the intermediaries and uses cryptography to secure the transaction. CFD providers tend to limit the amount that can be sent by credit/debit card (due to risks) and may specify bank transfers as the way to send larger sums.

e-Wallets are another approach. They can combine security, reliability, and very fast processing. This is partly because the e-Wallet is already set up and connected to the trader's bank account or credit card, in effect they can remove some of the steps involved in moving money by pre-processing via accounts already set up by the trader with them. In this case, trust is pre-established and the e-Wallet provider can process near to the speed of electronic signals.

Why use different types of payment processing?

In general, traders may wish to consider bank transfers for larger amounts. This is seen as a secure method but can take longer and may be more expensive (and also may have variable charges due to intermediaries in the transfer process). For those who want to transfer quickly and with lower fees, then credit cards or e-wallets can be a sound choice, with the caveat that an e-wallet has to be set up beforehand (by creating an account), while a credit or debit card may be used out of the box. Once set up, e-wallets can offer a secure, reliable, and fast way to deposit funds and may have significantly higher deposit limits than a credit card, if this is a factor for a trader.

The trader needs to check the costs associated with a transfer, such as fees to make the transaction beforehand (charged by the payment provider and potentially also by the CFD provider), which will typically be shown by the broker when choosing each method. So even if the CFD provider does not charge for deposits, the trader needs to check how much the payment provider charges.

Something else to look out for is the minimum deposit. The minimum deposit is generally defined as the minimum initial deposit to open the live account. But while the CFD provider may set a minimum deposit, the payment provider itself might have a different minimum deposit. In general, this only becomes an issue for CFD providers offering very low minimum deposits (or none), however, the minimum deposit required by the provider needs to be checked. CFD brokers normally have a table in their funding tab that shows the details of each provider they support.

Optimising performance - decentralisation vs centralisation

As all who use them know credit cards are fast, in fact, they can seem almost instantaneous when used at a POS. As we have seen, this is partly to do with the way payments are credited. However, there is still a lot of processing involved to allow this to happen within the financial system's payment networks.

Credit cards have to process a huge number of transactions daily. They do this using data centers. Data centers allow for scale, they allow for optimisation, and they allow for reliability through redundancy and concentration of resources, so faults can be repaired, however, they can be at risk of major failures. This is centralisation and the positive things it allows and its occasional risks.

The other side of this coin is decentralisation, which is seen in the blockchain. In between, in some sense, are companies using APIs to optimise processes. With current technologies, centralisation delivers speed and reliability. However, decentralisation delivers inbuilt robust redundancy, as networks simply find other routes to process transactions.

The blockchain generally operates on the Internet which was built to withstand multiple points of failure, from its origins as a military system. Hybridizing centralisation and decentralisation is a tricky path but some try and do this, with the aim of a robust, failure-proof system with high-speed processing, and some level of central oversight for efficiencies at scale.

Payment method availability

CFD providers tend to be pretty innovative compared with brokers offering different types of markets, partly due to their global nature. Feature availability tends to depend on the trader's region. This means that some payment methods may not be available in some regions. It also means that certain payment methods may be particular to specific countries or regions. The base of payment methods is normally Bank transfers, credit/debit cards, and e-wallets. PayPal is a very popular third-party payment provider and some CFD brokers may offer availability. Of the e-Wallet payment providers, Neteller and Skrill are widely available via CFD providers.

In the case of these payment providers, the trader needs to set up an account with each provider to avail of the range of features and convenience each offers. e-Wallets such as PayPal offer peer-to-peer payments as well as e-Wallet services however when using PayPal to fund a CFD account, the trader is using it as an e-Wallet. There are, nonetheless, developments occurring in using peer-to-peer technology to fund CFD trading accounts. When using payment methods, the trader needs to take note of restrictions that may be placed on their use.

For brokers focusing on global markets cryptos (i.e. blockchain deposits) are already available, in some cases. In general, there are two ways to directly deposit crypto. The first method is to send the crypto via the blockchain, wallet to wallet, but with an ultimate destination a trading account that is not denominated in the crypto, but in fiat. Thus the crypto deposit gets converted to fiat and deposited into the account.

The next way is to send a crypto to an account denominated in the crypto. So this is a wallet-to-wallet transaction, however, one which is processed by the CFD provider as well. Each crypto has a time taken to process it, some faster than others. However, the total time taken may depend on any further processing.

The CFD provider needs to support either of these methods for them to be applicable, and many do not. However, this may well be an area that will demonstrate increasing adoption in the future, due to its convenience as well as the support crypto enjoys among traders. Some CFD providers may offer crypto onramps via payment providers specializing in crypto, offering a user-friendly way to send crypto as a deposit.

Emerging and future developments

The finance system has its set and tried and tested processes to move money, based on banks, trust, and data transfer and processing. However, innovation has happened where start-ups and established companies have taken these methods and found ways to optimise or bridge these processes via bank APIs. This can be seen in e-wallets and payment processes such as peer-to-peer payments.

Alternatively, some technologies have emerged that find an entirely different path to move value, which is to say the blockchain. Because of its novelty and its decentralised nature, the blockchain is not fully mainstream in terms of its use by CFD providers, but it is available. The blockchain can take time and be congested and in some cases costly, and the units of transfer can be extremely volatile, thus there has been a focus on making new technologies to overcome these issues.

So it might be that blockchain-related technologies may drive future developments in payment processing as they offer a way to make worldwide payments at relative speed, reliability, and scale. The core developments have been and continue to be from the heart of the crypto ecosystem (including Bitcoin, Ethereum, Ripple, and Stellar) however mainstream finance is also getting involved in these technologies, even at the level of Central Banks. Stablecoins offer a way to mitigate the intense volatility of cryptos, thus these can be seen as a focus of development efforts for stable blockchain transfers.

Sidenote focus - depositing

Traders may have varying ideas about what they want out of trading. However, when making the first deposit they might wonder how much to send. The first thing to note is that CFD trading is risky and the trader should only trade with money they can afford to lose. The next thing is the minimum deposit. Some brokers have no minimum deposit, but does this mean that the trader can send small sums? The trader needs to have sufficient sums in their account to open a position and withstand adverse moves. In leveraged trading (normally offered by CFD providers), both gains and losses are amplified. Thus in a move against the traded direction, losses can build up quickly. This is why the trader should trade extensively on a demo before live trading and in between live trading. CFD brokers provide demos and some offer a demo version of their platform as part of the sign-up process.

High leverage offers a way to trade markets with lower account sizes. However, a less risky way to trade with low account sizes is to trade with low trade sizes. This means the position sizes can be small such that the effect of adverse moves is reduced.

Some CFD providers offer low trade sizes, either as a low minimum trade size or via a Cent-type account (on MetaTrader). Cent accounts are denominated in cents which has the effect of reducing the minimum trade size of 0.01 standard lots. These brokers tend to have small minimum deposits, which the trader may be able to trade with.

However, in general, the trader may wish to consider that to trade comfortably, they might need to deposit considerably more than the minimum deposit. Thus brokers who have high minimum deposits may be more realistic in terms of the amounts required to trade CFDs. All this is even more so in regions where leverage has been restricted. If the trader wants to trade with smaller amounts, then they might wish to consider position trading at a broker offering markets with no leverage.

Brief summary

The traditional banking system has banks as its payment processing backbone. Other financial services companies can connect to this network and apply optimisations to create faster and lower-cost payments. Alternatively, the blockchain exists as a separate backbone, also electronic in nature. Both rely on the updating of ledgers, but the blockchain uses Internet-based, automated, trustless decentralisation, while the mainstream backbone relies on centralisation and trust.

However, there are trade-offs in centralisation vs decentralisation which can be used to create faster and lower-cost blockchain networks, and there is already a crossover between these two backbones. The CFD trader will tend to use payment providers connecting on the mainstream backbone, but there are emerging innovations in the use of the blockchain as well.

CFD Brokers & payment methods

CFD providers tend to operate globally but may have different branches in different regions with differing regulations. Broadly speaking, CFD providers offer bank transfers, credit/debit cards, and e-Wallets. However, some may offer other technologies as well. CFD brokers may offer payment methods specific to a country in addition to their broad offering of payment methods. The CFD provider's website will list the methods specific to the trader's account.

Demo to live

The trader does not need to use a payment method to trade on a demo account. Demo or virtual accounts (sometimes called trading simulators) will have a balance in virtual currency, which is not real and cannot be withdrawn. This balance can be traded to test out the provider, its platform, and trading itself. To start trading on a real account, the trader will need to use a payment provider to add funds.

Where to find funding information

The CFD provider will often have a page on their website titled Funding or Payment Methods or something similar. This may either be found on the top menu or the bottom menu. There will generally be outlined the payment methods available and their details. This information may also be on a FAQ page. However, payment methods and details should be available from the trader's account page, when this is set up. If payment methods are important to the trader, they may check these initially from the CFD provider's website. It will be noted that some deposit methods may be immediate, but withdrawals can take longer, this is because of additional processing by the CFD provider required to withdraw from a trading account.

There are several rules common to CFD providers and brokers in general regarding payment and one is that they do not accept third party payments. Below is provided a list of 10 CFD providers along with some details including main payment methods. For some the full list may be much longer, as it will include country or region-specific payment methods. Again, the trader can normally check these in advance from the website for their region.

This list will in effect provide examples to the analysis presented above, illustrating how and why payment methods operate. Please note that this specific information about available payment methods is subject to change and the trader should consult the website for the CFD provider of interest.