The upstarts challenging banks in forex market

It’s reckoned that 80 percent 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 percent in forex transaction costs, which explains why newer entrants charging 1-1,5 percent, and sometimes less, see this as a market worthy of attack.

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.

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

The transaction costs are sometimes frightening, as much as 12 percent in some cases, and an average of 6,24 percent, according to the World Bank.

Crypto and blockchain-based companies have started to chisel away at these remittance costs, charging around 1 percent, 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. — Monyweb.