STUART THEOBALD: Plenty of competition issues in foreign exchange market

By Stuart Theobald

This column was first published in Business Day on 27 February 2017.

The Competition Commission should not stop at the prosecution of bank traders who manipulated the rand exchange rate. It should undertake a full investigation into the competitiveness of foreign exchanges services as a whole in SA. The bank traders manipulated a small part of the market that only affected very large companies. But in SA it is the poorest sections of society that face the biggest rip-offs for foreign exchange.

A World Bank study late last year found that SA is the most expensive among the G20 states for sending remittances abroad. It costs an average of 17.9% to send $200 from SA to another G20 country. That is more than double the average cost for the G20, and eight times the lowest cost country in the world, Russia at 2.1%. SA ranks second on the cost of remitting money into the country with costs of 8.1%, following China (10.3%).

Foreign exchange competitiveness is not about the level of the exchange rate, which is how many people read the current Competition Commission case. It is actually about the cost of buying and selling foreign currency. Those costs come in various forms. Most important is the “spread”, the gap between the buy price and the sell price. Whenever you see a foreign exchange board advertising prices you will see two prices for each currency – what that provider will buy for, and what it will sell for. For instance, Rennies over the weekend was offering US dollar notes for R13.3445 and buying them for R12.4706. That means the spread was 87.39 cents. So every time Rennies buys a dollar and then immediately sells it, it banks an 87.39 cent profit (I don’t mean to pick on Rennies – that was just the rate board I saw. Its competitors are not much different). Usually that is expressed as a percentage, which in this case is 6.55%. So if it were to do R10m turnover on a day, the revenue it earned would be about R655 000. Apart from the spread, foreign exchange providers regularly add additional fees and commissions for the transaction and that is usually a few hundred rand and are a fixed fee, irrespective of the amount. I have to laugh when providers tell you they will buy back any foreign exchange you might have left over at the end of an overseas trip “for free”. Of course, what they mean is they’ll not charge you fees, but they still will bank the spread. The point is that the poorer you are, and the smaller the amounts you are buying, the higher the costs you are going to face. Foreign exchange pricing is one of the most regressive consumer cost structures there is.

The Competition Commission could do us all a favour by digging into exactly why the spreads faced by SA consumers are so large. In part it is to do with costs that providers face: volumes are relatively thin and the fixed costs of infrastructure have to be covered. Part of those costs stem from regulatory requirements like ensuring clients comply with Fica. But a massive contributing factor is the impact of exchange control. Foreign exchange providers have to comply with a complex set of regulations and much of the fees they charge is to help clients comply.

Perhaps the biggest impact on the competitiveness of the market is the strict controls that the Reserve Bank places on exactly who can offer foreign exchange services. While in the rest of the world Fintech is aggressively shaking up the retail foreign exchange and remittance markets, SA continues to be dominated by a sclerotic collection of “authorised” foreign exchange dealers. There are only 27 of them and some of the more dynamic global companies that are shaking up foreign exchange markets simply aren’t allowed in.

One major disruption in overseas currency markets has been the introduction of peer-to-peer foreign exchange markets. Imagine if you’re visiting London and need to buy R10 000-worth of pounds. You post that requirement on a virtual board. Someone in the UK planning to visit SA needs rand, so they’ll step up as the counterparty. You agree to the exchange at the midpoint, eliminating the spread entirely. The platform takes a small fee to manage the clearing of the amounts between you and compliance with money laundering rules, but you’ve both probably ended up with 3% more money than you would have otherwise.

SA is very far behind the curve in currency technologies, and very far behind international pricing trends. The biggest reason for that is not collusion between traders, but the arcane foreign exchange control regulations that ensures the market stays in the hands of a cabal of banks. The Competition Commission may be able to shine a light on just how much consumers end up paying for it.