What is a Currency Exchange?
A currency exchange is a business that has the legal right to exchange one currency for another to its customers. Currency exchange of physical money (coins and paper bills), is usually done over a counter at a teller station. Currency exchange businesses that operate such transactions can be found in a variety of forms and venues. It may be a stand-alone, small business operating out of a single office, or it may be a larger chain of small exchange-service booths at airports, or it may be a large international bank offering currency exchange services at its teller stations. On a larger scale, this is referred to as repatriation.
Currency exchange services can also be found through businesses that offer these services online. This may be offered as part of the services provided by a bank, forex broker or other financial institution. A currency exchange business profits from its services either through adjusting the exchange rate or charging fees or both.
KEY TAKEAWAYS
Currency exchange businesses operate out of small stores or big banks to physically exchange one currency for another.
Currency exchange can sometimes be done more efficiently online.
Currency exchange fees vary so much that credit card fees may be less than the fees paid through adjusted exchange rates.
How Currency Exchange Works
Currency exchange businesses, both physical and online, allow you to exchange one country’s currency for another by executing buy and sell transactions. 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 would be able to purchase would be dependent on the international spot rate, which is basically a daily changing value set by a network of banks that trade currencies.
The currency exchange store will modify the rate by a certain percentage to ensure that it makes a profit on the transaction. For example, suppose the spot rate for exchanging U.S. Dollars into Australian Dollars is listed as 1.2500 for the day. Which 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.
Because the transaction is not conducted at the spot rate, and depending on the profit that the exchange wants to make, consumers may find that it is less expensive to incur ATM or credit card fees at the foreign destination, rather than use exchange services ahead of time. Travelers are advised to estimate how much money they will spend on a trip and compare the amounts saved through typical transactions.
Airports are a common place for currency exchanges where travelers purchase currency of their travel destination or exchange 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.
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 ATM’s are a viable option for those banking with a global bank. For example, HSBC ATM’s are prevalent in New York, London, and most large Asian cities.