How banks screw you on forex purchases
Banks fail to reveal the percentage they charge when we swipe overseas or buy imported items online
Having decided to open an office in London, I am travelling overseas more than ever before. And hence my latest hobby-horse has become the charges built into foreign-currency exchange transactions by the banking industry. For most people who do not have an offshore bank account, travelling overseas and paying for everything with an SA credit card is convenient. From hotels to restaurants, we spend without giving it much thought beyond doing the basic maths of multiplying the prices by about 14 when in the US and 18 when in the UK. Some people are more rigorous. They check the exchange rate by Googling it and use their mobile calculator to work out the price using the live exchange rate displayed. But that is where it stops. We complain about the price of that cup of coffee, but only once we are already drinking it.
Some South Africans, mostly those who still believe they will need to flee the country with a suitcase, and hence religiously hoard money offshore using their foreign-exchange allowances, have gone to the trouble of opening a bank account with an offshore bank or a local bank that has an offshore presence. (When transferring money offshore into an offshore bank account, as a premier client of my bank I get to pay them a “mere” 2%.)
Those people pat themselves on the back for the fact that they have transferred their money offshore ahead of time and can use a local credit card to pay for any purchases made. Despite thinking we are savvy, we have all missed the real magician’s trick played by every bank in SA, called the “spread”. The “spread” is nothing more than the difference between the instant or spot exchange rate (for instance, R14.37 to the US dollar, as displayed by Google at a precise point in time) and the “exchange rate” quoted by a foreign-exchange dealer or bank when you transfer the money offshore, or applied when you make a purchase. The spot rate is the price the bank pays to buy the US dollars it on-sells to clients. In other words, the difference is the profit margin made by banks on all transactions involving foreign exchange. The spread is invisible, in that it is not displayed anywhere, nor reported anywhere. And yet it is one of the highest charges in the financial services industry, bar interest rates applied to loans.
So prepare yourself for the moment of truth. When using a credit card, the fee you pay is 5% of each transaction. So whatever you thought that cup of coffee cost you, add 5%. The regulators have done a lot to force the savings and investment industry to start disclosing charges in a fair and transparent manner. Since 2016, there is nowhere to hide for unit trusts and exchange-traded funds. All fees, including management, performance, custody, trusteeship and audit fees, as well as trading costs, must be disclosed on a quarterly basis in all marketing documentation. For umbrella funds and retirement funds investing in regulated products, the moment of truth is coming on March 1 2019, when new disclosure requirements kick in, forcing providers to publish the same numbers the unit-trust industry has been obliged to disclose. Some financial services providers are already ducking and diving but, even if delayed, the legislation is in play. Although I have little faith that true disclosure will happen immediately, competitors will watch competitors, so they would be ill-advised to fudge the numbers.
No such disclosure regulation is in the making for the banking industry when it comes to foreign-exchange transactions. And yet those fees affect us every day. Whether you are buying something imported or via Amazon, whether you are travelling overseas or merely paying for Netflix, iTunes or an iStore app, 5% disappears into the ether.
The time has come for regulators to focus on bank disclosure and impose limits on certain charges. The sooner the better.
Magda_Wierzycka is Sygnia Group CEO.