I am amazed at the naivety of finance people in business (who should know better) being ‘suckered’. And, I use that term with a pinch of derision thrown in. To be specific, I am amazed that they get suckered by offers from their financial institution. Offers that purport to match or better the FX rate they are receiving from their current supplier.
The reality is that most people don’t know what rate they are achieving. Let alone what margin they are paying to their FX provider.
To provide some clarity let me unpack this in simple terms. I will also offer some suggested solutions:
Issue No 1 – Safety of your funds with a bank.
One of the big ‘hooks’ of the banks (who are the major FX providers in Australia) is that your funds are secure. Oh don’t they play this as a trump card!
It is a completely true statement that your funds are safe with a government guaranteed bank. However, there is one very important piece of information that you are not told. Your (non-bank) FX provider can also utilise one of the (big four) banks to maintain custody of your funds.
In other words, your funds are just as safe during the FX trade process by a non-bank provider – provided the custody of your funds is held (in trust) with a bank at all times.
Yes, it’s that simple. Your funds held in trust are safe in the hands of a (guaranteed) banking institution. And meantime, you get all the benefits of an FX trade through a non-bank institution.
Suggested Solution 1 – make sure your funds are in custody by a (big four) bank at all times. This is a simple question to ask your non-bank provider.
Issue No 2 – Misalignment of interests.
Where there is a misalignment between the interests of the FX provider and the customer – problems will (not may) occur.
Consider this – the vast majority of FX dealers receive a bonus on commission.
This means that the greater margin they can charge the customer – the more bonus the dealer and the institution can make.
So regardless of what deal or rate or willingness to match the rate that you are paying with your current FX provider, there will always be a margin temptation for the dealer and the institution. Take extra margin (from you the customer) when the circumstances such as market allow.
The solution to this issue is simple and also connected with Issue No 3 below – read on…
Suggested Solution 2 – make sure that the dealers of your FX provider are NOT compensated by commission. This ensures that the dealer has no temptation. Other than to provide you with advice or trade on your behalf in a manner which benefits you.
Issue No 3 – Lack of transparency. This is by far and away the biggest pitfall of all and in some ways, comes as no surprise.
So, your financial institution has offered to match the rates you receive from your current provider.
On the surface, this sounds great, right? The bank ‘feels’ safer (see Issue No 1) so let’s go with the bank, shall we?
Let me be clear. I am not ‘bank bashing’ because it’s recently become a popular ‘sport’. Especially after the Royal Commission into banking.
The fact remains that there was and continues to be close to zero transparency from banks in regard to FX trades. No reporting of margin or at least the rate achieved vs the interbank rate (which is the margin). You can undertake the task yourself – but it takes a little effort.
At the time of writing there is not one Australian bank that I am aware of that will provide a transparent FX deal report. A report that shows the actual FX trade information:
- the time of the FX deal
- the rate charged
- the interbank rate (i.e. the wholesale rate the bank received).
With this information you can actually know how much your FX trade actually cost you.
There is no current requirement for any institution to provide such information. So, it should come as no surprise that there is no accountability or transparency provided by the banks in regard to FX.
It becomes a simple sales ploy for the FX provider to entice the customer back.
“We will match your current rate!”
Most people have no idea of the margin they are being charged – they just accept what they are told.
It is a simple process for the FX provider to gradually increase to the margin you are being charged. There are no reporting requirements so it’s easy to do and hard for the customer to pick up any change.
Solution 3 – Only utilise an FX provider who will provide transparent report showing:
- Time of the deal (within 15 seconds)
- FX rate charged at the time of the deal
- Interbank (or wholesale) rate at the time of the deal (which is in the public domain)
Let me package this up for you:
- Make sure your funds are at all times held in custody by a (big four) bank
- Make sure the dealers of your FX provider are not compensated by commission
- Only utilise a FX provider who will deliver transparent reporting.
Talk to us – we are happy to assist.
If you think that what I am saying in this article seems a little far fetched then look at some real-life examples below.
Here are 3 recent examples that we have seen first hand in our membership in 2019:
- 2 international companies listed in other markets
- 1 Australian company that is ASX listed
Example 1: Large International Listed Company / wholly-owned Australian manufacturing subsidiary
Annual Trade value $40 M (AUD)
|Currency Sell / Buy||Type||Previous Avg.|
|Attracted Fee||Previous Fees Paid|
|SPOT SELL AUD, BUY EUR||SPOT||1.50%||Y||$25.00|
|SPOT SELL AUD, BUY USD||SPOT||1.00%||Y||$25.00|
|SPOT SELL AUD, BUY JPY||SPOT||1.50%||Y||$25.00|
|SPOT SELL AUD, BUY HKD||SPOT||1.00%||Y||$25.00|
|SPOT SELL AUD, BUY CAD||SPOT||4.00%||Y||$25.00|
|SPOT SELL AUD, BUY THB||SPOT||2.50%||Y||$25.00|
|SPOT SELL AUD, BUY NZD||SPOT||0.50%||Y||$25.00|
|SPOT SELL AUD, BUY GBP||SPOT||1.25%||Y||$25.00|
To put the above table in perspective the advertised default rate offered to our members is 0.3%. Above $10 M annual value the rate may be less than 0.3% in many circumstances
Why is a big four bank charging such high (noncompetitive) spot rates?
It is difficult for the customer to find out the true margin charged. That is without decent (transparent) reporting (see example below that resolves this issue).
There is no rule to provide transparent reporting. And, (in this case) the bank dealers receive a bonus on the margin achieved. The customer pays whatever rate the dealer feels the customer will pay.
Example 2: Enterprise International Listed Company / wholly owned Australian distribution subsidiary
Total Trade Value to rolling 12 months to Feb 2019 $18,065,979 (AUD)
Total Trade (margin) Cost $54,992 (AUD) – 0.3%
The customer receives monthly (transparent) reporting from us of the above trading (see example below). Why did the customer move back to the bank?
The bank offered to match the rates achieved in the previous 12 month period.
So not offering a saving but:
1. Banks offer the perception of being a safe haven. The customer already had their funds held by a big four bank prior to the move back to the bank. So no benefit there. Plus they also had the benefit of transparent reporting which verified the trading cost. The bank does not provide this.
Yet the customer moved.
Given that the bank does not provide transparency, in our experience this customer will be paying higher trade costs within 12 months. If you doubt this then look at example 3 below.
Example 3: Listed Australian Company
Customer trades approximately $60 M (AUD) on an annual basis using 3 out 4 of the big four Australian banks.
We audited 107 trades for a total of $51,661,133 (AUD) across various currencies. The trade cost (margin) ranged from a low of 0.10% to a high of 0.97% with an average of 0.37%
The customer used the above information to extract a lowered agreed rate of 0.13% with a single bank provider (who does not provide transparent reporting).
Two years later the customer wondered why their FX cost was higher.
We conducted another audit on behalf of the customer for trades in the prior 6 month period.
The average rate charged had now risen to an average of 0.18% as again no reporting to confirm the trade costs (margins) charged.
Customer has now migrated all trading to take advantage of our transparent the reporting platform.
It shows all trades, rates achieved, margins applied and the true cost of trading on a monthly basis.
Their funds are safe in a big four (Tier 1) bank. The average rate they are paying is now 0.10% … and they can report on it.
…. Unfortunately the reality is that sometimes pain is the best (and often only) effective teacher.