Definition
A currency exchange is a licensed service that converts one national currency into another. This can mean swapping physical cash (notes and coins) at a counter or obtaining foreign currency through an online service, bank, or peer-to-peer platform. A currency exchange (also called a bureau de change or casa de cambio) is distinct from the interbank foreign exchange (forex) market where banks and traders trade large blocks of currency.
How it works (step-by-step)
1. Market reference: The exchange uses the international spot rate (the prevailing daily rate set by banks trading currencies) as its reference.
2. Rate adjustment: The exchange applies its own markup to that spot rate so it can earn profit; the customer never receives the raw interbank spot rate.
3. Fees: The business may also charge an explicit service fee or commission.
4. Transaction: You give your home currency (cash or bank card) and receive the foreign currency at the adjusted rate; excess foreign cash can usually be converted back later.
Key terms
– Spot rate: the quoted daily exchange rate between two currencies on the interbank market.
– Bid price: the rate the dealer will pay to buy a currency from you.
– Ask (or offer) price: the rate the dealer will charge to sell you the same currency.
– Bid-ask spread: the difference between the ask and the bid; a source of profit for the exchange.
– Convertibility: whether a currency can freely be exchanged for foreign currency; nonconvertible currencies limit trade and tourism.
How currency exchanges earn money
– Explicit fees/commissions charged to customers.
– The bid-ask spread: the exchange sells at a higher ask price and buys back at a lower bid price. For retail customers, both mechanisms commonly operate together.
Worked numeric examples
Example A — Markup on a spot rate
– Published spot rate: 1 USD = 1.2500 AUD (so 1 USD would buy 1.25 AUD in interbank trading).
– Exchange’s retail rate: 1 USD = 1.2000 AUD.
– Effective cost to customer: 1.25 − 1.20 = 0.05 AUD per USD (the exchange keeps the 0.05 AUD difference as markup).
Example B — Bid-ask spread and kiosk profit
– Ask price (customer buys euros): 1 EUR = USD 1.40.
– Bid price (customer sells euros): 1 EUR = USD 1.30.
– Traveler Ellen wants to buy EUR 5,000: she pays 1.40 × 5,000 = USD 7,000.
– Traveler Katelyn sells EUR 5,000: she receives 1.30 × 5,000 = USD 6,500.
– Dealer profit from those two opposite transactions = USD 7,000 − USD 6,500 = USD 500.
Where to find currency exchanges
– Airport kiosks and booths (convenient but usually offer worse rates).
– Bank branches and credit unions (often better rates for customers; some allow pre-ordering foreign currency).
– Online currency-exchange services and forex brokers.
– Multi-currency debit/credit cards and global bank ATMs (offshore ATMs may be an efficient option with certain banks).
Practical tips
– Airport exchanges are convenient but typically more expensive than city branches; avoid if you want the best rate.
– Compare total cost: include both explicit fees and the effective cost from a worse exchange rate.
– Consider withdrawing cash from a bank’s ATM abroad if your bank has favorable international ATM arrangements; this can be cheaper than buying cash beforehand.
– Check whether your bank offers multi-currency cards that let you load or spend in the local currency with low fees.
– Look into any country-specific taxes or charges that apply when buying local currency.
– Estimate how much cash you’ll need and avoid exchanging large sums at high-markup locations.
Short pre-trip checklist
– Estimate cash needs for daily expenses, tips, transit, and emergencies.
– Compare
– Compare rates and fees across providers before you leave; record advertised exchange rates and any explicit fees so you can compare apples-to-apples.
– Notify your bank and card issuers of travel dates and destinations to reduce fraud blocks on ATM or card transactions.
– Order some small-denomination notes for immediate needs (transport, tips); large bills can be hard to change.
– Pack multiple payment options: at least one credit card (for purchases), a debit card (for ATM cash), and a small amount of local cash.
– Make copies (paper and/or photo) of passport and cards; store copies separately from originals.
– Set daily spending limits or alerts on your bank app to monitor unexpected charges.
– Know your ATM network options and fees (your bank’s partners, plus local bank fees).
– Learn about dynamic currency conversion (DCC): when a merchant offers to charge your card in your home currency rather than the local currency; this usually uses an unfavorable rate and/or extra markup—decline DCC and ask to be charged in the local currency.
– Plan an emergency cash source (backup card, travel card or a small emergency fund kept separately).
On-arrival actions
– Use bank ATMs that display bank logos or belong to large international networks; avoid standalone exchange kiosks in tourist areas.
– Prefer card payments for large bill purchases (hotels, car rentals) because they typically use the card network’s wholesale rate; check foreign transaction fees on your card.
– Keep receipts and exchange confirmations when you convert cash or use an ATM—these help resolve disputes.
– Break larger bills into smaller ones when possible; some shops and taxis have trouble with large notes.
– If you must use a currency exchange kiosk, ask for the mid-market rate shown on a phone and compare; if their rate is significantly worse, walk away.
Worked example: how to compare an offered rate vs the mid‑market rate
Assumptions:
– You want to convert USD 1,000 to euros (EUR).
– Mid-market (interbank) rate: 1 USD = 0.9000 EUR. This would yield EUR 900.00 (theoretical best).
– Airport kiosk rate: 1 USD = 0.8700 EUR (no separate fee).
– Bank ATM rate: charged at mid-market but with a 1.0% markup on the rate and a $5 ATM fee.
Steps and calculations:
1. Airport kiosk result:
– EUR received = 1,000 × 0.8700 = EUR 870.00.
– Difference from mid-market = 900 − 870 = EUR 30.00.
– Effective percentage cost vs mid-market = 30 / 900 = 3.33
2. Bank ATM result (with stated assumptions)
Assumption clarified: the ATM charges its $5 fee in USD before conversion (common but not universal). The card rate is mid‑market less a 1.0% markup, i.e. 0.9000 × 0.99 = 0.8910 EUR per USD.
Steps and calculations:
– USD converted after fee = 1,000 − 5 = USD 995.00.
– EUR received = 995 × 0.8910 = EUR 887.545 → EUR 887.55 (rounded).
– Difference from mid‑market = 900.00 − 887.545 = EUR 12.455 → EUR 12.46.
– Effective percentage cost vs mid‑market = 12.455 / 900.00 = 0.01384 = 1.38% (rounded 1.4%).
Comparison summary (from this example)
– Airport kiosk: EUR 870.00 received; effective cost ≈ 3.33% vs mid‑market.
– Bank ATM (with 1% markup + $5 fee taken before conversion): EUR 887.55 received; effective cost ≈ 1.38% vs mid‑market.
Conclusion in this case: the ATM/bank withdrawal gives more euros and a lower effective cost than the airport kiosk.
General formula and quick checklist
– Mid‑market EUR amount = USD_amount × mid_market_rate
– Received EUR amount = USD_amount_converted × offered_rate (if a fixed fee is taken in USD before conversion, subtract it first)
– Effective cost (%) = (Mid‑market_EUR − Received_EUR) / Mid‑market_EUR × 100
Checklist to compare any offered rate
1. Look up the current mid‑market (interbank) rate using a reliable source or app.
2. Ask the provider for the exact exchange rate and any fixed fees. If they refuse, don’t proceed.
3. Convert the amount in question using the provider’s rate and subtract fixed fees (in the currency they’re charged).
4. Compute effective percentage cost using the formula above.
5. Consider transaction size: fixed fees hurt small exchanges more; spreads hurt large exchanges more.
6. Beware of Dynamic Currency Conversion (DCC): if a merchant offers to charge your card in your home currency, that usually uses a worse rate — decline DCC and pay local currency.
7. For frequent or large conversions, prefer cards/accounts that advertise “no foreign transaction fee” and show interbank rates.
Worked numeric sensitivity note
– Fixed fee effect: if the same 1.0% markup and $5 fee applied to a USD 10,000 conversion, the $5 becomes negligible:
– USD 10,000 at 0.8910 = EUR 8,910.00 vs mid‑market EUR 9,000 → cost ≈ 1.0% (markup dominates).
– For small amounts, the fixed $5 can push effective cost well above the percentage markup.
Practical tips
– For travel, use debit/credit cards with low/no foreign transaction fees and withdraw larger ATM amounts less often to amortize fixed ATM fees.
– Avoid airport kiosks and tourist-exchange counters that don’t display rates transparently.
– Check with your bank about foreign ATM partner networks to avoid issuer surcharges.
– Keep a rate-checking app handy so you can compare any offered rate to the live mid‑market rate before accepting.
Sources
– Investopedia — Currency Exchange: https://www.investopedia.com/terms/c/currency-exchange.asp
– OANDA — Currency Converter & FX History: https://www.oanda.com
– XE — Currency Converter & Exchange Rates: https://www.xe.com
– Consumer Financial Protection Bureau
https://www.consumerfinance.gov
Quick practical checklist (when converting cash or using ATMs)
– Check the live mid‑market rate before you accept any offered rate (use a rate app or website).
– Prefer debit/credit cards with no foreign‑transaction fee; use chip + PIN where available.
– Avoid currency exchange kiosks at airports and tourist areas unless they clearly show the exchange rate and fees.
– Withdraw larger ATM amounts less often to amortize fixed ATM fees, but don’t carry excessive cash.
– Say “no” to dynamic currency conversion (DCC). If given the choice, pay/withdraw in the local currency — the card issuer’s rate is usually better than a DCC markup.
– Ask your bank which ATM networks waive issuer surcharges or reimburse fees abroad.
Worked numeric example (shows how fixed fees + percentage markups add up)
Assumptions
– Mid‑market rate: 1 USD = 0.90 EUR.
– Bank/exchange charges: 1.0% markup on rate + $5 fixed fee.
– You convert $500 USD.
Step 1 — Mid‑market euros you would get (no fees)
– 500 USD ×