Why is the cost of forex so high in SA?

THE cost of sending R1 million to the US can come to about R20 500 via the bank, which seems a hefty price to pay considering that this is all done electronically.

So why is the cost of

forex so high in SA?

Some of the costs are visible — such as the SWIFT fee, which ranges between R500 and R1 000 regardless of the size of the transaction.

The real pain is in the hidden spread charged by the banks. The graphic below explains what’s going on. It’s easy to see how banks are able to generate more than R15 billion a year in forex fees for taking on little or no risk.

Should you want to move R1 million abroad, your first port of call would likely be a Google search for the current USD/ZAR exchange rate.

Let’s say the rate comes back as R18 to $1, but when you enquire with your bank you get a rate of R18,36.

That’s a spread of R0,36c for every dollar purchased, which leaves plenty fat on the table for the banks.

“Most people have little or no idea how their forex charges are calculated,” says Harry Scherzer, CEO of Future Forex.

In the example shown above, shipping R1 million in US dollars to the US comes in at a cost of more than 2 percent. Some corporate companies doing large volumes of cross-border payments may be able to negotiate fees below this, but for most South Africans and SMEs, 2 percent (or more) is what they will likely pay.

This is orders of magnitude higher than bank-to-bank transfers between the EU and the US, and explains why alternative forex service providers such as Future Forex are opening up a new front in a market clearly in need of competition.

A cheaper alternative

Future Forex is about 50 percent cheaper for individuals transacting forex, and about 30% cheaper for businesses — though this depends on the size of the transaction and other factors.

What this means in practice is that you could be paying 30-50 percent more than you should per US dollar, euro, pound and so on purchased than if you deal with the banks, and that can quickly add up when the transactions sizes are large.

“Many of our customers doing high volumes of business forex transactions started to see how these costs were eating into their profit margins. Paying 1.5-2 percent each time you ship money abroad through a bank can quickly impact your bottom line,” adds Scherzer.

The same is true for individuals wanting to invest offshore.

The bottom line: Most forex service providers typically overcharge on the spread, sometimes as high as 2-3 percent plus a SWIFT fee of R500-R1 000.

“We are able to undercut this by taking advantage of economies of scale, automation and sound relationships with the banks,” says Scherzer.

A personalised forex service

Future Forex clients are assigned a dedicated account manager who is readily available to deal with any queries or to chase up transactions.

This is in contrast to the forex call centres operated by the banks.

“We made it our signature that we offer a personalised forex service so that none of our clients have to deal with an impersonal call centre or be pushed from pillar to post,” adds Scherzer.

“Our priority is stripping away the lack of human interaction that our customers tell us they experience with the banks. More importantly, our account managers know our clients personally and understand their unique requirements. That makes a huge difference.”

Complimentary AIT approvals

Future Forex assists clients sending over R1 million abroad by providing — at no charge — ‘‘Approval of International Transfer’’ (AIT ) applications from the South African Reserve Bank.

Future Forex aims to be an all-in-one solution for both personal and business forex requirements.

“Managing the paperwork for buying and selling forex can be complex,” explains Scherzer.

“For instance, when sending money internationally, you need to select a Balance of Payments (BoP) code to specify the transaction’s purpose.

‘‘At Future Forex, we simplify the entire process for our clients. We’re fully digital and will handle all the administrative work on your behalf.”

Future Forex has also recently introduced its mobile app, providing clients with a convenient solution to manage their forex transactions. — Moneyweb