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Is it worth using currency account for overseas trip?

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Does it make sense to use a currency account for an overseas trip? Maya Fisher-French checks it out

We recently ran an article about the different options for offshore bank accounts and highlighted foreign currency accounts, which are effectively on-shore accounts linked to your local bank account that have low minimum deposit rates.

These can be used, for example, if you are going overseas in December and are concerned about any potential currency weakness in that you could transfer your spending money into the foreign currency account today without exchange control approval.

But is it worth it, considering the costs? Foreign exchange is a pretty expensive business and the banks make a fair amount of money in fees.

Firstly, you have to convert into the foreign currency, which has a transactional cost, and then you have to exchange the money back into rands because you cannot make third-party payments – incurring another transactional fee.

We looked at the big four banks to understand the effect fees would have on a R20 000 deposit into a US-based foreign currency account.

Although our initial attempt was to have the banks convert at the same time to compare the rates, this proved challenging as the currency markets are too volatile to get an accurate comparison. So what we did was compare the spread between selling and buying rands and included any transactional costs to understand the total cost implication.

The currency spread is the difference between the price to buy or sell a currency. For example, at 12pm on June 23, according to Nedbank, you would have paid R14.75 for every dollar you bought, but if you were selling dollars, you would only receive R14.40 per dollar.

That difference is called the spread. The spread matters in this scenario as you have to buy and sell the dollars over a period of time and the spread would effectively be a cost to you.

The first thing we found was that the spread rates differ between banks. In the corporate environment, the spread is a lot more flexible depending on the amount you are trading and the current position of the bank.

In the retail market, with relatively small amounts being traded, the spread as a percentage tends to be fairly static.

Standard Bank had the best spread – only 2.15% difference between buying and selling rands – while FNB had the worst spread at 3.22%. Absa’s spread was 2.57% and Nedbank’s was 2.37%.

Secondly, there was a difference in the transactional fees to deposit and withdraw from the foreign currency account, with Standard Bank being the most expensive at R110 per transaction, Absa at R70 per transaction, FNB at R65 per transaction and no fee charged by Nedbank – making Nedbank the most cost-effective of the banks when it comes to foreign currency accounts.

FNB’s Global account came in the most expensive due to the high spread and transactional fees but, that said, it is the only bank that allows you to open and transfer online without going into a branch.

This does save time, but one would also think it would keep costs lower for FNB. This is perhaps why FNB awards such high eBucks points for foreign exchange transactions.

The total cost of the exercise ranges from 2.37% to just less than 4% – so that means the rand would have to move by more than 3% to 4% to make it viable to use a foreign currency account to save towards your holiday.

In December and January, the currency fell by 18% – so it certainly would have protected against that major shock.

However, if you invested in dollars at the end of January, you would effectively have lost on the exchange rate because the rand is now about 17% stronger than it was on January 17.

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