The upstarts challenging banks in the forex market

Thought to be worth R15bn a year in profits to the major banks, forex is a market that is begging for disruption — and several new challengers are happy to oblige, reports Moneyweb.

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.

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.

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 is 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 rates — 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.

Here are a few factors that contribute to the higher costs associated with bank forex services, according to Omer Iqbal of FiveWest.

Wide spreads: Banks typically offer wider spreads compared to brokers. The bid-ask spread represents the difference between the buying and selling prices of a currency pair, and banks often have larger spreads to increase their profit margins.

Commissions and fees: Banks may charge additional fees and commissions for executing forex transactions. These fees can vary depending on the bank and the type of transaction, adding to the overall cost of trading.

Minimum trade sizes: 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.

Limited market access: Banks may not offer the same level of market access as specialized forex brokers. 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.

Lack of transparency: Banks may not always provide transparent pricing for forex trades. The lack of transparency can make it difficult for traders to fully understand and compare the costs involved, potentially leading to higher overall expenses.

“It’s important for individuals and businesses to carefully evaluate the costs and services provided by banks when considering forex trading. Comparing multiple providers, including specialized forex brokers, can help determine the most cost-effective options for executing forex trades,” says Iqbal.

A good idea is to use a currency converter app that provides forex comparisons between SA banks, as offered here at Moneytransfer.online.