We recently ran an article on the various options for offshore bank accounts and highlighted foreign currency accounts (FCA) which are effectively on-shore accounts that are linked to your local bank account and have low minimum deposit rates. These could be used, for example, if you are going overseas in December and are concerned about the rand weakening between now and then. So 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 your rands into the foreign currency, which has a transactional cost, and then you have to exchange back into rands as you cannot make third-party payments – so another transactional fee.

We looked at the big four banks to understand the impact fees would make on a R20 000 deposit into a USD-based foreign currency account. Although our initial attempt was to have the banks convert at the same time in order to compare the rates, this proved challenging as the currency markets are too volatile to get an accurate comparison. What we did, however, 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 23 June, 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. Although 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 2.37%.

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

FNB’s Global Account came in as the most expensive due to the high spread and transactional fees, but that said, FNB is the only bank that allows you to open a FCA and transfer money 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 has such high eBucks rewards-earning rate for foreign exchange transactions.

The total cost of the exercise ranges between 2.37% to just under 4%. So that means the rand would have to move by more than 3%-4% in order to make it viable to use a FCA to save towards your holiday. In December and January, after Nene-gate, the currency fell by 18% over the month, so having your money safely tucked away in dollars certainly would have protected against that major shock. However, if you bought dollars at the end of January, just as the rand was at its weakest, and wanted to use them now, you would effectively have lost on the exchange rate, as the rand is now almost 16% stronger than it was on 17 January.

Breakdown of costs

Cost per R20 000 to deposit into a dollar-denominated fund and then withdraw into rands. The spreads were based on information provided at 12pm on 23 June 2016. Any currency movement is not considered in this example.

Absa
Spread 2.57% (R514 on R20 000)
Cost to deposit: R70
Cost to withdraw: R70
Total cost: R654 = 3.27%

You need to go into branch to open a FCA, although Absa is working on an online option. To make a deposit or withdrawal you have to complete a foreign exchange document which can be done via email.

FNB
Spread 3.22% (R644 on R20 000)
Cost to deposit: R65
Cost to withdraw: R65
Total cost: R774 = 3.87%

A Global Account can be opened through online banking, and transfers between your Global Account and your other FNB accounts can be done online.

Nedbank
Spread 2.37% (R474 on R20 000)
No cost to deposit or withdraw
Total cost: R474 = 2.37%

You have to go into a branch to open a FCA and to make deposits and withdrawals. It takes 48 hours to do the transfer.

Standard Bank
Spread 2.15% (R430 on R20 000)
Cost to deposit: R110
Cost to withdraw: R100
Total cost: R650 = 3.25%

You need to go into branch to open a FCA and to make any deposits and withdrawals.

This article first appeared in City Press.