Unfortunately, if you thought 2016 was a wild ride, it is likely to just have been the opening salvo before more upheaval. The foreign exchange market is set to be even more volatile in 2017 than before. Thanks to the Trump election, Brexit, possible populist wins in Europe, wars and terrorism, local political uncertainties and many other factors, South Africans are going to be faced with ongoing foreign exchange exposure. And a volatile rand breeds risk and insecurity. Not to mention the recent uproar with the local banks’ forex scandal.
However, just like the rest of the banking world, foreign exchange services are being shaken up thanks to the rise of financial technology (fintech) players. Fintech is disrupting and disintermediating traditional financial institutions such as banks, in the same way that Uber overhauled the taxi industry.
New lean and agile forex intermediaries can help businesses and individuals mitigate their foreign exchange risk by doing things differently, harnessing the power of technology and using new business models. With more than 15 years in the industry and hands-on experience in shaping it in South Africa, Richard Beddow, CEO of ForexPeople, looks at the role forex intermediaries can play in helping companies and individuals ride out the 2017 storm.
Why are customers looking to forex intermediaries for help with their foreign exchange transactions?
In the past customers have used banks for all their finance needs. But they are quickly realising the benefit of using new, specialist financial services companies. Banks simply cannot compete with the product focus and level of customer experience that these intermediaries offer especially at the SME end of the market.
In South Africa, a legitimate compliance and regulatory framework, set up by the SA Reserve Bank in 2012 stipulates the conditions that an intermediary has to adhere to, giving customers confidence in trusting intermediaries for advice and transactional support on their Foreign Exchange dealings.
What role do forex intermediaries play in the marketplace?
Think of a forex intermediary as you would a bond originator. They are highly focused on one financial service, and so can offer more specialised advice, products and a better and more transparent overall customer experience.
What are the benefits of going to a forex intermediary rather than a bank?
Firstly, the exchange rate that an intermediary offers should be better than that of a bank. This is due to the aggregation-effect gained through the volumes intermediaries deal in. For example, a large intermediary can combine the forex requirements of 600 to 700 clients to leverage better deals from the banks, compared to if each client approached the bank independently.
Secondly, the level of customer experience you get from an intermediary is far more client-focused, usually following a single point of contact model. Although most intermediaries use advanced technology behind the scenes, the interface with the client is deliberately very personal.
The biggest benefit however, is that intermediaries really understand small businesses and so can help them actively manage their forex risk through simple hedging practices. South African Importers and exporters are exposed to massive currency risks and need as much help as possible to protect themselves in an unstable currency environment.
Are forex intermediaries and forex traders the same?
Forex intermediaries are very different to forex traders and unfortunately the two are often confused. Forex trading is a risky, speculative game where investors try to buy and sell currencies for personal gain. Forex intermediaries are brokers or aggregators that help importers and exporters make cross border transfers and protect themselves from exchange rate fluctuations. They also help individuals with their Personal Allowance transfers. It is vital that this distinction between intermediaries and traders is made.
How has the forex industry evolved in South Africa?
In 2003, when we started ForexPeople, the forex intermediary industry was pretty much non-existent with maybe two or three brokers. As the industry grew over the next eight years, it was clear that the regulations hadn’t kept pace. It was a tricky time, as, although we were licensed under the Financial Services Board (FSB) we weren’t officially recognised yet by the South African Reserve Bank.
In 2011 ForexPeople and a group of other intermediaries kick-started the process of formalising the industry when we defined our role in the marketplace to the SA Reserve Bank. This ultimately led to the SARB publishing regulatory conditions and a code of conduct for the newly-recognised industry in 2012. As part of this process, the SARB acknowledged that forex intermediaries played a critical role in servicing the needs of the SME importers and exporters through better client relationships and an advisory service that was previously lacking in the market.
Today, in addition to SARB, the Financial Services Board (FSB) and the Financial Intelligence Centre (FIC) also regulate the forex intermediary industry.
In a nutshell, SMEs and Individuals can be confident that they are dealing with a well-regulated, credible and secure alternative to the Banks for their forex requirements. They can expect a refreshing and reliable experience while managing critical aspects of their businesses.
If you have any more questions on the role of forex intermediaries in our current foreign exchange market please contact us.