A simple guide to mastering forex for businesses and HNWI

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Harry Scherzer | CEO | Future Forex | mail me |


When it comes to forex in a South African context, how can South African businesses and High-Net-Worth Individuals (HNWI) ensure that they are receiving the best service possible and secure the best rates?

It is estimated that the local daily forex trading volume in South Africa is over US$19.1 billion, and, according to the results of our upcoming research report, more than three-quarters of businesses contracting forex service providers in South Africa were not sure how their providers were charging them. In addition, more than half of the participants would consider changing their provider.

Mastering forex might seem daunting, but in reality, it all starts with getting the basics right.

Understanding the South African forex landscape

Choosing the right forex service provider based on your business needs begins with understanding South Africa’s forex landscape.

The South African Reserve Bank (SARB) has implemented mandatory exchange controls that apply to these transactions, stipulating that they must go through an Authorised Dealer (AD) or Authorised Dealer with Limited Authority (ADLA), who is required to report back to the reserve bank.

Local businesses and HNWI may contract the services of banks for their forex requirements, but they aren’t required to deal directly with them. They can also go through a Treasury Outsourcing Company (TOC), a registered Financial Services Provider (FSP) that will act as an intermediary between the business or HNWI and the AD.

A good TOC will help the business complete forex transactions at a lower cost and will also simplify the onboarding and documentation processes. This is important because those processes can be complex with traditional ADs.

Understanding costs and hidden fees

Most of us are aware of the fact that forex service providers charge for the transactions they facilitate. They are businesses, after all, and they need to make money. But what you might not know is how those fees are structured. There are two main fees you need to know about.

Processing fees

Forex service providers, whether ADs or TOCs, will charge a set of fees for each transaction processed. The most well-known is the transaction fee, which can be charged as a set fee or as a percentage of the total transaction.

A commission fee (usually based on a percentage of the transaction amount) may also be charged, as well as account maintenance fees.

Many are familiar with processing fees since they are transparently stated during transactions. However, it’s crucial to note that this fee often represents only a fraction of the total charge – the lion’s share is often hidden in the less transparent exchange rate margins.

Exchange rate margin (also referred to as “the spread”)

The spread, meanwhile, is simply the difference between the rate at which a forex service provider buys a currency and the rate at which it sells it.

The spread can be expressed as a percentage relative to the exchange rate, which fluctuates over time because of its responsiveness to market sentiment. Because there is no standardised practice or rule about how big the spread is allowed to be, it’s a lot easier for forex service providers to charge inconsistent and occasionally exorbitant margins, and so this is the primary fee to watch out for. 66% of participants in our survey did not know about the exchange rate margin.

So, for example, if a South African business had to hypothetically import goods from the US today at US$10,000, a deal could be booked with an AD or TOC. If the exchange rate is currently 18.70, that business would expect to pay around R187,000.

However, because of the spread, that business could get quoted a rate of 19.1 (~2% more), which equates to a fee of R3,740. We can also assume that in this example, the business will pay between R500 and R1,000 in transaction fees, bringing their total spend for US$10,000 (R187,000) to around R191,000 (a total cost of over R4,000).

The spread frequently overshadows processing fees, often accounting for a significant proportion of them, sometimes even multiple times more. As a result, businesses and HNWI may unknowingly incur higher costs through the spread, all the while believing they are only paying a nominal processing fee. This lack of transparency can lead many to underestimate the true cost of forex transactions.

If that business was initiating transactions for over R1 million multiple times in a year, spread fees could end up costing them hundreds of thousands of Rands. The good news is that there are local providers that charge a fair spread and are completely transparent about the fees they charge. Understanding how these fees are charged is part and parcel of forex mastery.

Beyond the fundamentals

We now have a good starting point when it comes to making cost-effective forex transactions. From here, more complex concepts enter the picture, such as Forward Exchange Contracts (FEC), Customer Foreign Currency (CFC) accounts, and trade finance.

FEC

An FEC, also known as forward cover, simply locks in a rate today for a near-future payment.

It is especially useful for protection against risks associated with fluctuations in foreign currency exchange rates. It’s hard to believe that in the same study we conducted, 61% of the participants did not make use of an FEC.

CFC accounts

CFC accounts, meanwhile, allow businesses to hold foreign currency, so that it doesn’t have to be converted back to Rands. This allows them to send and receive currency without being affected by the exchange rate.

Trade finance

Trade finance is a loan used for funding import trades where the imported goods are used as collateral. This can help reduce risk by reconciling the needs of an importer or exporter.

Understanding these concepts paves the way for forex success. It is, of course, possible to dig deeper into forex for business, but any entrepreneur who understands the fundamentals should be in a position to find their ideal forex service provider.

The sooner a business finds a good – and transparent – forex service provider, the bigger the positive impact on its bottom line will be. That is the art of mastering forex.


 



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