Currency Exchange

Currency Exchange: Definition, How It Works, and Where to Find It

What is a currency exchange?

A currency exchange is a business that lets customers swap one national currency for another. These services can be provided at teller counters (banks, airports, hotels), specialized kiosks (bureau de change / casa de cambio), online platforms, or via peer-to-peer services. Currency exchanges are distinct from the foreign exchange (forex) market, where banks and traders transact large-scale currency trades.

Exchanges earn revenue through service fees and by adjusting the exchange rate they offer relative to the market (the bid-ask spread).

How currency exchanges work

• Spot rate: The international spot rate is the benchmark daily rate set by banks and market participants. Retail exchanges typically do not transact at the exact spot rate.
• Markup and fees: A currency exchange will:
• Charge an explicit service fee (flat or percentage).
• Offer a rate that is worse than the spot rate (a markup), effectively charging an additional cost on top of any visible fee.

Example:
– Spot rate: USD 1 → AUD 1.25 (1.2500)
– Exchange offers: USD 1 → AUD 1.20
– Effect: The exchange keeps the 0.05 AUD difference per USD — an effective fee on the transaction.

Because of these markups, it can sometimes be cheaper to withdraw cash abroad from an ATM with a bank card (taking into account ATM and foreign-transaction fees) or to use a credit card that waives foreign fees.

Important: Currency convertibility matters for international trade, investment, and travel. Some currencies are restricted or taxed by local authorities, which can add cost or limit access.

Where to find currency exchange services

• Banks and credit unions: Often offer the best rates to account holders and can order foreign currency in advance.
• Airport kiosks and hotel desks: Convenient but usually more expensive due to higher markups.
• Dedicated bureaux de change: Stand-alone shops or chains in tourist areas.
• Online currency-exchange providers and fintech apps: Can offer competitive rates and home delivery or pickup.
• ATMs at destination: Withdrawing local currency at an ATM can be cost-effective if your bank has low international ATM fees or partners abroad.
• Multi-currency cards: Some banks and fintech firms issue cards that hold multiple currencies with low fees for spending abroad.

Tip: Compare options before travel and estimate how much cash you’ll actually need. Watch for country-specific taxes or restrictions that may apply when purchasing certain currencies.

Bid-ask spreads (retail)

• Bid price: The amount a dealer will pay to buy a currency from you.
• Ask price: The amount a dealer charges to sell a currency to you.
• The difference (spread) is another source of profit for the dealer.

Example:
– Quoted EUR/USD: 1.30 / 1.40
– To buy EUR 5,000 at the ask (1.40): 5,000 × 1.40 = USD 7,000
– To sell EUR 5,000 at the bid (1.30): 5,000 × 1.30 = USD 6,500
– Dealer profit from the spread: USD 500

When you see two prices, the higher is what you pay to buy the currency; the lower is what you receive when selling.

FAQs

• Can I get foreign currency at my bank?
• Yes. Many banks will exchange cash for customers or allow you to order currency for pickup or delivery.
• What is the cheapest way to buy foreign currency?
• Check local banks or credit unions first; they often offer better rates. Using an ATM abroad or a no-foreign-fee credit card can be cheaper than exchanging cash in advance.
• Can I just use a credit card abroad?
• Yes, if the card is widely accepted at your destination. Confirm foreign-transaction and cash-advance fees with your issuer, and still carry a small amount of cash for places that don’t accept cards.

Bottom line

Currency exchanges provide a convenient way to convert money for travel, business, or remittances. Costs vary widely: compare bank rates, ATMs, online providers, and multi-currency cards before exchanging. Pay attention to service fees, markups, and bid-ask spreads to minimize the overall cost.