Currency Exchange 101: Basics You Should Know

Currency exchange businesses are found in a variety of forms. They could be a single store located on the corner of an intersection, a larger chain of stores, or an international bank, broker or financial institution with specialist currency exchange booths. More recently, with the advent of the Internet, more and more exchanges are now available online. After linking your bank account, you can receive funds directly as per the prevailing rate on the quoted day. These exchanges make their money through two primary means:

Regardless of whether you choose to exchange your currency at a brick-and-mortar outlet or online, the primary function of an exchange is to enable you to convert one currency to another either by buying from or selling to you. Expanding on the example above, if you are a Canadian looking to travel to the United States, you would use the currency exchange to change your Canadian dollars into US dollars. The amount of US dollars you would get in return for each Canadian dollar is contingent on the prevailing rate on that particular day (known as the spot rate). 

In this example, if the Canadian currency exchange rate is 0.75 USD for every 1.00 CAD, then this spot rate would get USD 75 for every CAD 100 that you exchange. However, transactions are not done at the spot rate. To ensure that they keep an element of profit for themselves, currency exchanges toggle this spot rate and keep the difference (known as the spread). 

In this case, a currency could potentially provide customers with an offer of 0.72 USD per 1.00 CAD. That means that instead of receiving 75 USD, the customer would receive 72 USD for every 100 CAD he/she provides. The currency exchange then keeps the USD 3 spread for themselves. Because these spreads may vary by day and by exchange, it could help you save significant costs if you shop around prior to selecting the best currency exchange for your needs.

Prior to departing a country, there are several ways that you can exchange your currency quickly and easily:

International ATMs

With certain types of cards, the international ATM withdrawal is a viable option for obtaining local currency. Using a debit card as usual, some banks have developed alliances with international partners that enables their clients to withdraw money internationally without fees. It is pertinent to note though that in the absence of fee-free options, the bank may charge anywhere from 3% to 8% fees.

Banks

One of the most common and convenient ways of exchanging cash is by going to local bank branches. Most large banks offer foreign currency exchange as a feature to their customers that can be availed either online or in person. Exchange rates at banks also tend to be better than other places because banks receive wholesale rates not available to public. In addition to that, at some banks, if you hold a high balance and/or a premium account, they will often waive delivery fees and/or provide you with better exchange rates.

Traveler’s checks

Similar to a conventional check, the traveler check has unique serial numbers and is an alternative to using notes and coins. Typically used by people when visiting foreign countries, the main benefits that it offers is security against lost or stolen checks and the convenience of not having to carry cash around. However, after arriving at a destination, the customer still has to find a place that will convert the checks into local currency and pay the affiliated fees accordingly.

Airports

All international airports host one or more international currency exchange desks where customers can hand over one currency to the clerk and receive another. However, these desks are often expensive and should generally only be used for emergencies.

Although currency exchanges have been around for a long time now, there have been fundamental paradigm shifts in the way we bank and the way we exchange money. Some new currency exchange methods that have creeped up in the recent past include:

Credit cards

The plastic credit card is a powerful tool that can be used on international travel trips. While some issuers may charge currency conversion fees of 2% to 3%, some special cards offer international travel privileges that include currency conversions at the spot rate.

Prepaid Foreign Currency Cards

Operating similar to a credit card, travellers can pre-load these foreign currency cards with a specific amount of the currency they will be using in the foreign country. Thereafter, it’s a simple swipe to make any purchases that they need to over the course of their trip. While this is a highly convenient method, it does come with high fees.

Online Providers

Online foreign exchange providers will ship foreign currency directly to your house based on spot rate adjustments plus a nominal delivery fee. These providers are convenient and offer a way to get cash on hand for immediate purchases made after entering a new country. However, the high delivery fees may be unfeasible for smaller amounts.

Given the plethora of options, it can sometimes be overwhelming to choose the best one given your specific set of needs and circumstances. The following are some easy practices that can be implemented to ensure that you are saving money on your next forex currency exchange.

Download an app that shows spot currencies in real time: Because currency rates can change on a daily basis, today’s bargain deal may be tomorrow’s unfavourable deal. To assure yourself of a good rate, download some of the many apps available online (such as the XE Currency Exchange) on your phone and benchmark your options to the spot rate shown.

The price is not always right: The rate should not be the only consideration though. Many providers will offer rates that are close to the spot rate, but then charge other ancillary fees such as delivery charges or services charges. Prior to initiating an international currency exchange, make sure you are optimizing the amount you are exchanging for total fees as well.

Change your credit card: Not all credit cards are created equal. Some cards offer the added benefit of not charging any foreign exchange fees when making an international transaction. Another benefit is that the rate is calculated based on a 30-day rolling average of the spot rate meaning that in countries with volatile currencies, you can save further by investing in the right credit card.

Do not convert hotel bills: Hotels based internationally will often ask if you want to convert the total bill into your own currency (CAD). Even if this is an option, do not take it. Hotels generally charge you higher rates than you would receive if you opted to let the credit card company handle the conversion.

Find someone with opposite needs: The best way to save on any costs at all is to find someone doing the reverse transaction of what you are doing. If you are visiting the States, find someone coming to Canada from the States and exchange at the prevailing spot rate directly. This enables both parties to save costs. 

When sending and receiving money abroad, there are multiple different options that can be used. The final selection should be made based on speed, efficiency and total cost of the transaction. 

For retail banking transactions, banks and credit unions offer wire services that charge a flat fee (normally between $10 and $50). The wire transfer is an electronic transfer of money that goes from one institution to another over a network such as the SWIFT or Fedwire. These transactions are immediate and reliable, and international recipients can access the funds within 2 to 5 business days from the day the transfer is completed.

There are several businesses specializing purely in money transfers from one country to another. These businesses may be in brick-and-mortar outlets (often as part of post offices or convenience stores) or may be an online presence. Fees and delivery times vary significantly though, so it could be worth using a comparison tool to find the best solution for your needs. One such tool is Finder!

Platforms such as PayPal allow you to transfer money internationally by connecting your bank account or credit card. A fee is then charged on this transaction. Other online providers include TransferWise, OFX, Xoom, MoneyGram, CurrencyFair and Western Union.