- Foreign exchange is all about volume, the more you transfer the better the price you get.
- Most SME’s don’t have the volumes needed to negotiate better forex rates with the bank.
- Banks add a hefty mark-up to the exchange rate and it’s not always explained how this mark-up is calculated.
Welcome to the first part of our forex educational programme. Over the next 5 weeks we’ll highlight some of the more common issues SME’s face when paying foreign suppliers and offer solutions to help overcome these challenges.
At the top of the list is the subject of price (forex margins & transfer fees). It’s worth noting that the price at the point of execution is often irrelevant in a market that moves by up to 30 cents a day, but we’ll discuss this point in more detail when we get to timing and how to make better currency buying decisions.
The problem with transferring funds through a bank
Most businesses still transfer funds through the bank, after all it’s convenient and they’ve never had a viable alternative. South African banks are expensive! They have large overheads & heavy cost structures which means wider margins and higher fees.
Stringent exchange controls have allowed banks to create their own foreign exchange monopoly. With little outside competition, banks have always had the freedom to charge what they like, and companies have often just accepted this as a cost of doing business abroad.
How banks make money on forex payments
Banks and independent money transfer businesses like FX Paymaster make money the same way, by adding a margin onto the exchange rate. The price quoted to the customer includes this margin, but it’s often not disclosed what the actual mark-up is (Especially when using a bank). As such, most businesses aren’t aware of what they are being charged to exchange currency. In addition to the margin, banks charge a hefty fee to transfer the funds abroad (R750-R1,500).
In April 2019, we conducted a rate survey of South African banks to see how their rates compared. The margins applied varied considerably as did the transfer fees.
US$ 15,000 would cost you:
A radically better way
Unlike Banks, FX Paymaster offer a flat fee structure of 6 cents & R 250 per payment for b2b payments. A first for the industry. They’re using technology and innovation to disrupt traditional financial methods. Think of it like this: They have the buying power of a super corporate which gives them access to highly preferential rates which they margin and offload to the market at a discounted rate AND they use their own proprietary technology to automate a lot of the payment process. That’s the beauty of being a new age fintech business.
Fintech doesn’t mean risky, in fact in many ways its far safer. The FX Paymaster platform for example talks directly to the banks back-end systems via a series of complex API’s, which reduces manual processes and minimises human error. They also use traditional banking channels (SWIFT) to transfer money and clients always fund their own accounts, which ensures the process is 100% secure.
A Coetsee, CGMA
Financial Manager | HG South AfricaTo date this was our 1st real large-ish fx payment with FX Paymaster and it saved us R 21k vs FNB – that’s decent money by anybody’s standard. We see these things in buckets, a saving like this pays a salary, or the printers or a new welding machine etc. that we did not have before. You line up a couple of these buckets in a year and before you notice it you’ve saved R5m/R10m a year.
