By Harry Scherzer, CEO, Future Forex
For most ordinary South Africans, the declining value of the rand over the past few years has been a big negative. It’s meant that everything from petrol to cars, electronics, and even your favourite sunglasses have gotten more expensive. There are, however, a few people for whom a weaker rand is a positive, most notably exporters.
That’s because, even if they charge the same price for the goods they’re selling internationally, they’re going to receive more money, at least in rand terms. And given that South Africa exports hundreds of billions or rands worth of goods every month, that can also be a net positive for certain sectors of the economy. But, even when exporters are winning on the exchange rate, they could still be losing out on valuable revenue.
That’s because of the way banks and other traditional forex providers charge for such transactions, with smaller and niche exporters especially impacted. Fortunately, it doesn’t have to be that way. By choosing the right forex provider, exporters can enjoy even better returns on every order.
Suffocated by the spread
In order to understand how exporters can end up getting less return than they should out of a transaction, it’s important to know how foreign exchange transactions work.
On any foreign exchange transaction, there are usually two sets of fees. The first can broadly be categorised as transaction fees and are typically clearly indicated to the client upfront. It’s undoubtedly important because the lower it is, the more money you’ll get whenever you have to convert a payment made in a foreign currency back into rands.
Where they should really be paying attention, however, is the exchange rate margin, sometimes referred to as the spread. In theory, there’s nothing untoward about the spread. It’s simply the difference between the median exchange rate and what the forex provider is able to offer you. And every bank charges it. The problem lies in the fact that banks and other traditional forex providers are seldom transparent about how costly the spread is. While there may be perfectly valid reasoning for a bank applying the spread it does, it won’t clearly indicate its cost to you. That means you have no way of knowing whether it’s fair or not. Added to that, there’s no uniform, industry-wide method for applying the spread. Those factors, in turn, mean that many big institutions get away with charging exorbitant margins, particularly to smaller players who don’t have the heft to negotiate better rates.
For exporters, that means that they don’t get as much money out of transactions as they should. For large transactions worth millions, that can mean leaving tens of thousands of rands on the table each time you transact. That’s not academic.
We’ve seen first-hand the impact that this lack of transparency, inconsistency, and overcharging on the spread can have too. Clients have come to us unaware of the fact that they were paying any spread whatsoever. So rather than just the R500-R1,000 fixed fee they thought they were paying for a transaction, we’ve had to explain that they were losing significant amounts of revenue because of the spread.
But even clients who are aware of the spread aren’t always aware of how much it’s costing them. One client, for example, thought it was a matter of cents but didn’t realise he was losing out on R10 000-plus on every transaction of over R1 million. For exporters making such transactions every month, that can quickly add up.
In addition to impacting their bottom line, the spread can actually impact an exporter’s competitiveness. A wider spread may make their goods or services relatively more expensive in foreign markets, potentially reducing demand and market share.
The right provider matters
Fortunately, there is a better way. By conducting their foreign exchange transactions with a provider that’s entirely transparent with the spread and which charges lower transaction fees, exporters can ensure that they’re getting maximum returns on every sale. Even putting returns aside, that additional certainty can be incredibly beneficial, especially given the fluctuations in the value of the rand over the past few months.
In fact, there’s an argument to be made that exporters should view getting the best possible deal on forex transactions as a business imperative. After all, if a business felt like it was getting a raw deal in any other scenario, it would move to another supplier or provider. So, why not do the same with a forex provider?
Look beyond the exchange rate
So, while exporters undoubtedly benefit from a weak rand, they should always look beyond the exchange rate. By choosing a forex provider that is transparent about the spread and which charges low transaction fees, they can ensure that they’re getting the best possible returns on transactions and protecting their ability to remain competitive.
