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What Is a Currency Exchange?
A currency exchange allows people to convert one currency into another. You’ll commonly find these services at airports, banks, and hotels, where they provide convenient access to foreign cash. Currency exchanges operate by quoting buy and sell rates, including service fees or spreads between these rates. While physical exchanges are common, many also operate online under regulatory oversight to ensure fair practices. Travelers can use a currency exchange to get easy access to the local currency when they travel.
Key Takeaways
- Currency exchanges allow customers to swap one currency for another, charging a fee for their services.
- These exchanges profit through service fees and the bid-ask spread.
- Currency exchanges can be found in locations like airports, banks, hotels, and are increasingly available online.
- The exchange rates at airports are typically more expensive than those at banks.
- Travelers can use credit cards abroad, but should plan for foreign transaction fees and carry some local currency.
Understanding the Currency Exchange Process
Currency exchange businesses, whether physical, online, or peer-to-peer, let you buy another country’s currency with your own.
For example, if you have U.S. dollars and you want to exchange them for Australian dollars, you would bring your U.S. dollars (or bank card) to the currency exchange store and buy Australian dollars with them.
The amount you can purchase is dependent on the international spot rate, which is a daily value set by a network of banks that trade currencies.
Fees and Rate Adjustments in Currency Exchange
Besides charging a fee, currency exchanges often adjust rates to ensure they profit from transactions.
For example, suppose the spot rate for exchanging U.S. dollars for Australian dollars is listed as 1.2500 for the day. This means that for each U.S. dollar spent, you can buy 1.25 Australian dollars if traded at the spot rate.
But the currency exchange store may modify this rate to 1.20, meaning you can buy 1.20 Australian dollars for 1 U.S. dollar. With this hypothetical rate change, their fee would effectively be 5 cents on the dollar.
Since exchanges don’t use the spot rate and aim for profit, using ATMs\ or credit cards abroad can sometimes be cheaper than exchanging currency beforehand.
Travelers should estimate trip expenses and compare possible savings from different transaction methods.
Important
Currency convertibility is essential in a global economy and critical for international commerce and finance. A currency that is inconvertible poses big barriers to trade, foreign investment, and tourism.
Locating and Choosing Currency Exchange Services
Currency exchange businesses can be found in a variety of forms and venues. One might be a stand-alone, small business operating out of a single office. Or you might find access to a larger chain of small exchange-service booths at airports. Often, a large international bank will offer currency exchange services at its teller stations.
Airports are common places for currency exchanges because of all the business and tourist travel. They enable travelers to purchase the currency of their travel destination immediately before their departure. Travelers can then change any excess money back to their local currency upon their return.
Because airports are seen as the last port of call, the rates at airport exchanges will, in general, be more expensive than those at a bank in the city of departure.
Photo © 2015 Kayte Deioma, licensed to About.com
Importantly, going cashless is becoming more common as some banks offer cards that can load multiple currencies on them with little or no fees.
In addition, offshore ATMs are a viable option for those banking with a global bank. For example, HSBC ATMs are prevalent in Europe, North and Latin America, Asia, the Middle East, and North Africa.
Currency exchange services are also provided by businesses that offer their services online. You may find that currency exchange is one of the services provided by a bank, forex broker, or other financial institution.
Tip
When traveling outside of your own country, watch out for country-specific fees. For example, prior to July 2020, Cuba charged tourists a 10% tax when buying Cuban convertible pesos (CUC) with U.S. dollars.
Deciphering Bid-Ask Spreads in Currency Exchange
As mentioned, currency exchanges earn their money in two ways. They charge customers a fee for their services and they take advantage of the bid-ask spread in the currency. The bid price is what the dealer is willing to pay for a currency, while the ask price is the rate at which a dealer will sell the same currency.
For example, Ellen is an American traveler visiting Europe. The cost of purchasing euros at the airport may be quoted as follows:
EUR 1 = USD 1.30 / 1.40
The higher price (USD 1.40) is the cost to buy each euro. Ellen wants to buy EUR 5,000, so she would have to pay the dealer USD 7,000 (1.4 x 5,000).
Suppose also that the next traveler in line has just returned from her European vacation and wants to sell the euros that she has left over. Katelyn has EUR 5,000 to sell. She can sell the euros at the bid price of USD 1.30 (the lower price) and would receive USD 6,500 in exchange for her euros.
Because of the bid-ask spread, the kiosk dealer is able to make a profit of USD 500 from this transaction (the difference between USD 7,000 and USD 6,500).
Just remember, when faced with a standard bid and ask price for a currency, the higher price is what you would pay to buy the currency and the lower price is what you would receive if you were to sell the currency.
Can I Get Foreign Currency at a Bank?
Yes, a bank often can help with that, especially if you’re a customer. For instance, at Bank of America, if you have an account, you can order foreign currency online and have it shipped to you the same day.
What Is the Cheapest Way to Buy Foreign Currency?
Check with a local bank or credit union first. They often offer the best rates on currency exchanges. Also, you may be able to use your credit card to get foreign currency from an ATM at your destination without paying foreign transaction fees.
Can I Just Use a Credit Card When I Travel Abroad?
As long as your card is accepted where you travel, yes. You can use your card for your purchases and payments—say, for hotel and restaurants. (Be sure to ask your bank about the fees for using your card abroad). Nevertheless, it might be a good idea to travel with some foreign exchange. So plan ahead.
The Bottom Line
A currency exchange is a service that allows travelers to convert one currency into another, primarily for physical cash transactions. You can find these services at banks, airports, online platforms, and through peer-to-peer exchanges. Currency exchanges earn money through service fees and the bid-ask spread, which can vary between providers. Make sure you research exchange rates and compare fees to get the best value. You may find that using your credit or debit card abroad with low foreign transaction fees may be more cost-effective.
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