Currency exchange (alternatively called “bureau de change” in Europe and Canada) is a type of business providing the possibility for its clients to change currencies from one to another at a rate based on an exchange rate determined by the forex market, but adjusted to allow the currency exchange organization to gain profits. They often charge fees of different sorts, traditionally a transaction fee, which may vary greatly from organization to organization as the reaction to the market changes and competitor’s activities. The difference between the prices at which a currency exchange sells and buys currency (also known as the bid-ask spread) is also an important issue, which requires examination.
It’s important to distinguish a currency exchange and the foreign exchange market, as the former is a business aimed at individuals, and the latter is about trading currencies in huge amounts by brokers.
Currency Exchange traditional form
The traditional form of a currency exchange is often represented by an actual place where physical money is used for exchange. There is a variety of such places like counters, kiosks and offices in different locations where it’s highly possible for people in need of currency exchange to appear, for instance, airports and train stations, hotels, malls, tourist agencies, and so on. With the rise of credit cards' popularity, the quick spread of the Internet and financial technologies, the traditional form has begun to be partly supplanted by online currency exchange services. Although some of such services are subdivisions of entities also providing a traditional money exchange system, like major banks and large financial organizations.
Currency Exchange essentials
When it comes to travelling or visiting other countries for work or study, one might need the local money to pay for goods and services at a new destination. There are several ways a person can obtain money via currency exchange.
The most traditional way, often associated with security and avoiding risks, but not always lucrative, is exchanging money in advance in a well-known and trustworthy money exchange business or at a bank. In such an organization, the business is organized the following way - the organization buys currency and then sells it at a higher price, profiting on the price difference and fees. The exchange rate used in a given organization is usually based on the spot exchange rate of a certain currency, which is set by the third party (traditionally, by the foreign exchange market), but is altered to provide the organization with income.
It would be useful to check out the rates of all available and reliable money exchanges, and choose one with the best conditions. Exchange rates and possible fees might be significantly different. The ways of charging fees may also vary. Some organizations are advertised as free of commission charges, but their exchange rates are often less attractive because the possible losses are compensated by adjusted rates. Typically, the highest rates are often found in places where people start or finish their trips, with these locations sometimes being the last chance to get the needed currency.
So, for example, a traveler has to exchange rupees to dollars. Let’s suppose that a spot exchange rate for the rupee to the dollar is 70 rupees for 1 dollar. One currency exchange available might offer another rate of 72 rupees for buying 1 dollar and 71 rupees for selling 1 dollar plus a commission for the transaction, which depends on the amount of money a person needs to exchange. Another available currency exchange store offers 75 rupees for buying and 70 rupees for selling, but charges no commission. So, the traveler needs to decide what sum of money is actually necessary for the trip, count the total cost of services in both money exchanges, and choose one that is more suitable at the moment.
Another possible way to exchange money is to do that in a destination after the arrival. The process would be similar, but the exchange rates and total cost of service might differ significantly in another country, which also worth finding out and consider as a possibility. Nevertheless, there might also be specific fees and charges set in a given country for certain currencies, for instance, in Cuba there is a tax charged on exchanging US dollars. One more disadvantage of such a way is that the exchange rates change daily, and it’s hard to forecast when it’s better to exchange currency without analyzing the market.
One more way to exchange money is fundamentally different, as it doesn’t suggest involving exchanging physical money at all or partly, and using a credit card instead. Nowadays, there are several types of credit cards, allowing the use of different currencies (usually with a fee), and there are also ATMs of international banks providing a possibility to get a needed currency in cash without visiting a traditional money exchange. The fees charged for the use of such a credit card or an ATM might turn out to be lower than those of a money exchange.
Currency Exchange difference in prices
Everyone who has ever exchanged currencies must have noticed that currency exchange services always give two different prices for one currency pair. One price is set to buy a currency (it means that an organization buys it from a client) and is usually lower. The second price is used to sell the currency, and it is higher. This difference is called a bid-ask spread.