The upstarts challenging banks in the forex market

It’s reckoned that 80% of SA’s R4.6 trillion GDP has a forex component, meaning money that either flows into or out of the country. This is a gold mine for the banks, since they get to toll most of this money each time it moves.

The five major banks – FNB, Standard Bank, Absa, Nedbank and Investec – are believed to make a combined profit of R15 billion a year from forex.

Smaller clients are paying 2-3% in forex transaction costs, which explains why newer entrants charging 1-1.5%, and sometimes less, see this as a market worthy of attack.

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With the rand/dollar rate dropping from above R19.77 to R18.30 in the past few days, companies are scrambling to place import orders at these preferential rates – but few pay much attention to the hidden costs of forex.

Costly … and complicated

Remittances (money sent from abroad, usually by family members) account for a huge part of the African economy, and as much as 25% of GDP in countries like The Gambia.

The transaction costs are sometimes frightening, as much as 12% in some cases, and an average of 6.24%, according to the World Bank.

Read: Zimbabwe stops short of free-floating currency in exchange rate battle

Crypto and blockchain-based companies have started to chisel away at these remittance costs, charging around 1%, and settling transactions within hours rather than the one, two or three days typically offered by money transfer companies.

When it comes to inter-bank forex, it is not always easy to see what the actual costs are – and this seems to be deliberate.

There are Society for Worldwide Interbank Financial Telecommunications (Swift) fees of somewhere between R500 and R750 a transaction.

And then there is a less visible cost in the currency exchange rate you are quoted. Banks will quote a mid-market rate, which is the mid-point between the price at which it buys and sells a currency, also known as a ‘spread’.

This ‘spread’ – the difference between the banks’ buying and selling rate – is complicated by the fact that exchange rates are constantly on the move, and bigger clients will get preferential rates.

So you are never really comparing apples with apples, and banks will typically quote you a rate that benefits them, leaving it up to the client to negotiate a cheaper rate. They pretty much explain this on their websites.

If you don’t ask, you’ll pay more. The problem is you have to burrow your way through an automated phone operator to a dealing desk, and if you succeed at that, the rate you get quoted depends very much on the dealer you get and the bank’s order book for the day.

Fuzzy picture

Harry Scherzer, CEO of Future Forex, says the lack of transparency in forex pricing makes it easy for the banks to get away with high charges.

“Our proposition is that we will give you a better rate than the banks, sometimes as much as 50% better, and our fees are transparent and once we have agreed on a pricing structure, we will stick with it. For companies and individuals that transact frequently in forex, that’s a huge saving over the course of a year.”

The opacity in forex costs works to the advantage of the banks.

It’s not just the higher costs of transacting that eats into the pockets of customers, it’s the lack of unbiased advice that can add to the costs over time, says Herman Bezuidenhout, CEO of BeztForex, a company that is nibbling away at this giant market by undercutting the banks on charges, and offering advice in areas such as hedging.

“Traditionally banks will tier their pricing, products and service levels according to the standing and size of the client,” says Bezuidenhout.

“Smaller clients often find themselves at the lower end of the importance scale. Banks are also not readily available to assist clients with complex foreign exchange and global trade transactions due to the scarcity of human resources in this highly complex environment.”

Limitations

Omer Iqbal, CEO of FiveWest, says apart from the hidden costs buried in the wide spreads quoted by the banks, and the associated transaction fees, banks often require higher minimum trade sizes for forex transactions, making it more difficult for smaller traders to access the market.

This can limit opportunities for retail traders and potentially increase costs for those who can’t meet the minimum requirements.

“Banks may not offer the same level of market access as specialised forex brokers,” says Iqbal. “They might have a narrower selection of currency pairs and limited access to certain forex markets, which can restrict trading opportunities and potentially result in higher costs for clients.”

Managing forex exposure

Most importers and exporters do not actively manage their forex exposures, with often devastating consequences for importers when the rand weakens, as happened over the past month.

Exporters are likewise guilty of neglect, says Bezuidenhout, by failing to hedge at a time when the rand is weak.

A case in point is the 7.5% strengthening of the rand against the US dollar over the past few weeks, which is lost revenue for exporters.

Read: Nigeria targets single FX rate in shift after governor’s ouster

A good idea is to download a currency converter app that provides forex comparisons between SA banks, as offered by the likes of Xe.com or Moneytransfer.online.

It’s not that banks are in danger of forfeiting this market any time soon, and many companies would rather use their transactional bank for forex because of the convenience and their ability to negotiate a good rate – but it’s good to know there are some hungry competitors popping up to challenge them.