Business Essentials: The Foreign Currency Account

James Mckeown from Domisa Treasury explains the Foreign Currency Account in a business context.

In South Africa, as everywhere, going into business from scratch as a startup or running an established business can be a daunting exercise with a host of challenges manifesting themselves alongside the considerable opportunities for success.

If you trade with foreign partners or clients, as an importer / exporter, tour operator / travel company, service provider, consulting or technology business you will have both revenues and expenses in foreign currency. In this article, we’ll explain what a foreign currency account is, and why it is a good idea to have a foreign currency account in South Africa.

Frequently Asked Questions : Foreign Currency Account

As an established Treasury in South Africa, we’ve helped countless businesses with their foreign currency accounts. Through this process, there are a few key questions that are repeatedly asked. In this article, we’ll answer them in a simple, straightforward way.

What is a Foreign Currency Bank Account?

A foreign currency account is simply a bank account for the business denominated in a foreign currency. Businesses with reasonable volumes of such transactions could increase profits by 5 – 15% simply by making them through foreign currency accounts, with a diligently selected provider.

What is a foreign currency account used for?

A Foreign Currency Account (FCA) allows non-resident individuals and foreign nationals to hold funds that originate from abroad and that are freely transferable. These funds can therefore be kept in currency and withdrawn at the client’s convenience. A range of currencies are available in the Foreign Currency Account.

How does a Foreign Currency Account work?

A typical bank account generally converts money to and from US dollars for transactions in foreign currencies. A foreign currency account allows you to send and receive funds in multiple currencies.

Why is this helpful? You save time with a streamlined transaction and money by avoiding the high fees that come with conversions.

Reduce volumes of Forex transactions

Being “on both sides of the spread” is expensive, and unnecessary

A foreign currency account provides the opportunity to receive, hold and pay invoices in that foreign currency without having to convert to or from ZAR for every transaction.

An example

Let’s assume the bank is quoting USDZAR 1% off the interbank rate of 14.50 giving the business a Bid / Ask “spread” of 14.355 / 14.645 (the spread) – I.e. bank will buy USD for ZAR14.355 and sell USD for ZAR14.645

An international client pays the business $20,000 for good or services. The business has associated USD expenses of $10,000, immediately payable.

Business does not have a Foreign Currency Account

• $20,000 receipt converted at 14.355 to ZAR287,100
• $10,000 purchased at ZAR146,650 to pay suppliers
• Remaining Balance is ZAR140,450

• 2 forex transactions
• Client “on both sides of the spread” – selling USD at 14.355 & buying at 14.665
• Client is ZAR3,100 (USD214) worse off 

Business has a USD Foreign Currency Account

• $20,000 receipt credited to USD account
• $10,000 paid to suppliers
• $10,000 remaining converted to ZAR143,550

• 1 forex transaction
• Client is ZAR3,100 (USD214) better off 

A Natural Currency Hedge

Foreign currency accounts provide a natural hedge

Currency hedging is the process of eliminating currency risk from a transaction where multiple currencies are involved.

An international transaction with a perfectly hedged currency position has no prospect of future currency loses or gains, with the success of the transaction then based purely on other core goods / services components.

Whilst some currency hedging techniques can be expensive, foreign currency accounts are perhaps the cheapest and easiest hedge available.

Building on the example

The international client pays the business $20,000.00 for good or services. The business has associated USD expenses of $10,000 but now they are only payable in 1 month.

Business does not have a Foreign Currency Account

• $20,000 receipt converted at 14.355 to ZAR287,100
• Business is now exposed to USD10,000 exchange rate risk on USDZAR, they could
  • Wait for a month to buy USD10,000 to pay supplier – the approach many small businesses take, accepting significant currency risk particularly considering the volatility of USDZAR
  • Execute a Forward Exchange Contract (FEC), buying USD10,000 for settlement 1 month forward if the bank allows (and prices reasonably!)
  • Execute a Foreign Exchange transaction and pay supplier 1 month early

Business has a USD Foreign Currency Account

• $20,000 receipt credited to USD account
• $10,000 converted to ZAR143,550
• $10,000 paid to suppliers 1 month later
  • By holding the currency of the future commitment there is a natural hedge and therefore no currency risk

It’s clear that use of the foreign currency account has fully eliminated the exchange rate risk and greatly simplified the operational elements of the transaction.

How can I Open A Foreign Currency Account?

Most of the major banks in South Africa offer foreign currency accounts with the only requirements being that your business hold a local currency (ZAR) account with them and the business has an acceptable reason for holding the account/s. There are however some items to consider.

Interest Rates

Foreign currency accounts held with domestic banks typically pay no interest at all on credit balances. In the current global low interest rate environment this is less of an issue than it may have been years ago, particularly for smaller businesses, but needs to be considered.

Bank Charges & Fees

These vary greatly between the banks but the best offers have no monthly administrative fees, no minimum balances and free online account access.

Transactional charges are a key consideration. Charges for international transfers in the same currency vary greatly. Make sure to understand the full range of charges for payments of different types.

Foreign Exchange Services & Related Fees & Charges

Once a business holds its domestic and foreign currency bank accounts with a bank / authorized dealer it is typically obliged to execute its foreign exchange and money transfer transactions with that institution. It is therefore critical to ensure a full understanding of:

• Forex Markups – the largest driver of cost. The % off the interbank spread, taken by the bank, whilst this may vary according to transaction size, should not vary from day-to-day or even dealer-to-dealer for transactions of the same size
• Fees – any other fees and charges related to the transaction, other than account management
• Services – does the bank or provider perform regulatory documentary functions or do they simply expect their clients to do this

How can Domisa Treasury assist

Domisa Treasury is able to assist SMME businesses in South Africa in managing their currency risk by facilitating the implementation of the correct combination of tools to achieve the optimal currency management solution for their unique business needs. We leverage our strong market relationships to make these solutions a reality for our clients. What we offer:

• Bank accounts – we facilitate the setup of foreign exchange transactional accounts with preferred providers
  • Rand (ZAR) accounts – High interest, no monthly fees, fully transactional internet banking
  • Foreign Currency Accounts – accounts available in all major currencies. No monthly fees, internet banking
    • International Payment Solutions – send, receive and hold foreign currency
    • International money transfer – pay foreign currency invoices directly from your currency account
    • Non-ZAR currency pairs – buy GBP with your USD for example
• Commission, Fees and Transparency – Domisa Treasury supports greater regulation of foreign exchange market participants, authorized dealers and intermediaries alike. Transparency to clients is paramount and we provide full disclosure of deal economics to every client on every transaction
  • Commissions – Domisa operates on published, highly competitive commission tiers:
    • Applicable to all our clients consistently
    • Our systems and processes do not allow deviation from these
    • We do not engage in ‘bait and switch’ pricing where transactions become more expensive for clients after the first few transactions – a pervasive problem in the industry
    • Clients always get our published tiers
    • Our live, online calculator is a highly accurate indication of where our clients are currently dealing
      • Available to everybody and requires no information to be provided in order to get an indication – its an opportunity to show off our fantastic pricing, not a data trawling exercise!
      • Use it to compare us to your current provider in real time
      • Click here to use the live calculator
  • Fees – There are no fees on transactions of R50,000.00 or greater and a flat fee of R250.00 below R50,000.00
  • Service – Domisa facilitates all functions for our clients including deal execution & settlement, regulatory reporting, South African Reserve Bank (SARB) applications and payments (both international & domestic)
• Products – Domisa is able to facilitate the full range of foreign exchange products
  • Same-day, Next-day and ‘Spot’ Foreign Exchange
  • Forwards – Forward Exchange Contracts (FEC)
  • Derivatives – Options and Futures

Please contact us for a free consultation to discuss your business needs and what Domisa Treasury could do to assist you in managing your foreign currency risk in the most efficient and cost-effective manner. Click here to contact us today. 

Want to find out more about Foreign exchange South Africa? Read this article.

What is a CFC account?

A customer foreign currency account is a transactional account denominated in a foreign currency. A foreign currency in our case, is any currency other than Rand. It is available in all major currencies and is a useful mechanism for managing foreign currency receipts and payments. The CFC accounts must also allow for transfers to or from its offshore bank account(s) abroad.

Who could benefit from a CFC account?

Below is a list of some of the benefits of a CFC account:

What is the best foreign currency account in South Africa?

The best foreign currency account in South Africa is dependent on your business’ unique needs. Our expert team at Domisa will be happy to assist you in securing unbeatable rates and managing your currency risk. Contact us today to find out more.