Foreign exchange (forex) transactions are the lifeblood of the global economy. It is therefore concerning to note that high pricing and transparency are major pain points for forex players in the small and medium enterprises space in South Africa, says Citadel Global Director and Treasury Partner, Bianca Botes.
These pain points were revealed in the recent Future Forex Survey on forex for South African small and medium enterprises, which found that price was the biggest concern for 22% of forex traders, with 14% saying a lack of transparency on their transaction and its cost was a major concern. The survey found that there was “room for improvement regarding pricing and transparency”, considering that 75% of respondents did not know how they are charged for each transaction and that 34% of respondents did not know what the exchange rate margin on their transactions was.
WHY TRANSPARENT AND FAIR FOREX SERVICES ARE CRITICAL FOR BUSINESSES
“Forex is critical to the business sector, because it drives international trade including importing and exporting, it helps businesses manage their currency risk through hedging strategies, it assists companies expand into foreign markets where they can reach new customers, it provides them with access to capital in international markets, and a favourable exchange rate can provide a competitive cost advantage to importers or exporters,” says Botes. “That is why it’s important to ensure that forex transactions are not inflated – it can quickly cause traders to lose their competitive edge.”
“It is crucial that businesses receive an exchange rate and pay additional forex charges that are commensurate with the amounts traded as well as the service received. Often the margin imposed on foreign exchange rates can mean the difference between a company reaching their profit targets or making a loss. Forex charges can have an impact on cost efficiency and profitability in multiple ways. Transparent forex charges promote trust and confidence in financial transactions, which is vital for business relationships and financial stability.”
Botes cautions that unfair forex charges can introduce unnecessary financial risk, while fair pricing can help companies forecast better and manage their costs.
UNDERSTANDING FOREX FEE STRUCTURES
Botes says that those trading in forex can start by looking at the spreads, commissions, and service fees within the fee structure of the financial products or services they are using. “Different transactions may have varying fee components. You can also compare different financial institutions and service providers’ fee transparency and competitive pricing. You can keep an eye on hidden fees that may not be immediately obvious by reading the fine print. Be aware of any potential extra costs, like overnight financing charges or withdrawal fees.”
Botes mentions that it is “perfectly acceptable to ask questions”. “Don’t hesitate to ask your financial institution for a breakdown of charges. Seek clarification on any terminology or fee components you don’t understand.”
“Many trading platforms and financial apps offer real-time forex rate tracking, which can help you stay informed about exchange rate levels and movements. Professional advisors can also share valuable insights and strategies to optimise your transactions, but first, you must ensure that your provider adheres to the guidelines by the South African Reserve Bank and ascribes to the Global FX code.” Botes says it is a common myth to think that treasury or outsourced forex providers were more expensive.
HOW TO ENSURE A SUCCESSFUL FOREX STRATEGY
“The key to being successful with forex is to have a strategy in place,” says Botes. “Define clear objectives for your forex transactions. Are you looking to reduce risk, take advantage of market opportunities, or simply facilitate international trade? Your objectives will guide your strategies.”
Botes advises that a good forex strategy would typically include a combination of risk hedging strategies, such as forward contracts, futures and options, and would be based on extensive market research on economic indicators, geopolitical events, and central bank policies that can influence exchange rates. It would also include regulatory compliance, it would be based on the client’s particular risk tolerance, and it would make room for diversification. A good strategy can also assist with cash flow management. Lastly, forex strategies need to be reviewed and assessed regularly, says Botes.