Reduce Fees on Money Conversions

The Business of Exchanges

From the money changers of biblical times to the modern age of intercontinental jet setters, the act of exchanging one form of currency for another has been taking place for thousands of years. Our modern, global economy has spawned a constant need for consumers and businesses to swap currencies, and most international travel wouldn’t be possible without the ability to make money exchanges. Banks, exchange houses, money brokers, hotels and airport exchange counters are all major participants in this dynamic industry. Credit and debit card issuers such as VISA, MasterCard and American Express process millions of currency exchange transactions each day on behalf of their customers, streamlining international trade through advanced technology.

The art of money changing is hardly a philanthropic endeavor. The various individuals and businesses involved in this trade – whether legally sanctioned or not – all have one common motivation: profit. By taking in more money than they return in trade, money changers capitalize on every individual transaction, and by handling a sufficient volume of transactions, a steady and sizeable revenue stream is realized.

In some countries, a “black market” exists for money changing, where participants conduct their business in a highly informal, unregulated manner. While some black market exchangers are actually legitimate entrepreneurs who seek to capitalize on the tourist trade, consumers must always be wary of engaging in these types of exchanges, as they may be prohibited under local law. The potential for violent crime is high, and incidents of robbery and physical battery can and do occur on a regular basis. Additionally, many tourists engaging in black market money exchanges unknowingly accept and distribute counterfeit currency, which exposes them to the possibility of further criminal prosecution.

The Element of Profit

In practice, there are several methods by which a money changer can earn a profit on an exchange. Money changers must not only cover their actual costs of making an exchange, but they must also include a extra margin in order to keep their business viable. Money changers use a combination of exchange rates and service fees in order to ensure a profit on each transaction. Understanding how these figures are calculated can help you get the most out of all your currency exchanges.

Most frequently, the money changer’s compensation will be included in the exchange rate itself. For example, a money changer’s advertised exchange rate for a US Dollars-to-British Pound Sterling transaction might be USD $1.00/£0.5417, and suppose a consumer might need to convert USD $100. What the consumer may not realize is that the money changer’s actual yield in converting USD $100 to the British Pound Sterling might be £56.42. By assessing a 4% fee on the converted amount, equating to £2.25, the consumer would receive the advertised rate in the exchange, equating to £54.17.

In some cases, a tiered fee system is utilized, resulting in a different charge contingent upon the transaction size. In a rare instances, a money changer will charge a flat fee for exchanges of all sizes. Consumers should be cautious of any money changer advertising a “0% commission” for a transaction, as there are probably some other fees involved that may exceed any reasonable percentage-based calculation.

Airports: A Captive Audience

Frequent international travelers are familiar with the need to change at least some of their home currency over to foreign currency before arriving at their destination in order to pay for incidental expenses like taxi fares, tips and other small purchases. In general, while an airport exchange counter is often the most convenient location for consumers to make currency exchanges, these counters also tend to offer the worst value.

Passengers awaiting flights in an international airport terminal constitute something of a captive audience, and money changers are keenly aware of this. As a result, they essentially have the liberty to charge consumers whatever rates and fees they want. Some governments regulate airport exchange rates, but for the most part, it’s a free market. Additionally, airport money changers often have high overhead costs, due primarily to the fact that their airport real estate costs are artificially inflated. Unless their rent is being subsidized by the local governmental airport authority for the convenience of all airline passengers, these overhead costs are passed along directly to consumers in the form of higher fees and poorer exchange rates. At some international airports, the combined fees for currency exchanges can be as high as 10-20% of the transaction amount.

If you absolutely need to exchange currency at a departure airport, try to make it a small transaction that will tide you over until you have some other options available at your destination. If you want to exchange currency prior to returning home, allow yourself enough time at the end of your trip to investigate other options before getting to your departure airport.

Heartbreak Hotels

Hotels represent another convenient means of exchanging money, though they are not known for providing the best value in currency exchanges. The hotel business is geared around the notion of comfort and convenience. From an accountant’s standpoint, room rates merely represent a base charge upon which hotel staff can then add various service charges for convenience items, so the “privilege” of being able to exchange your money at the same location where you rest your head each evening comes at a steep cost. Smaller hotels may not offer the service at all.

One slight advantage of using a hotel’s services to obtain foreign currency is that the charges can usually be added to your bill for convenience, but this convenience can be costly. Since most travelers end up paying their bill by credit or debit card, the cost of obtaining foreign currency from a local ATM machine that honors cards from the VISA, Plus, MasterCard, Maestro, or Cirrus financial networks may actually be cheaper than getting currency from the hotel.

Banks: The Best Bang For The Buck

Banks, in general, offer the best rates of exchange to consumers. This is primarily due to the fact that banks tend to base their exchange rates on “wholesale” prices offered to their larger commercial customers. All banks compete with one another, and it’s rare to find any two banks offering the same rate of exchange and fees on a particular currency transaction. Provided that you have the time and motivation, it often pays to shop around for the best deal before committing to a transaction.

Large commercial banks with an international presence will tend to offer better exchange rates and fees than smaller banks. This is due to the fact that many smaller institutions lack the infrastructure to process currency exchange transactions in-house, and will instead partner with a larger institution through a “correspondent” relationship to provide these services. The partnership comes at a cost to the smaller bank, which in turn, passes the expense along to consumers in the form of higher rate and fees.

Even in some of the largest foreign cities, the task of finding a conveniently located bank is not always easy. Additionally, banking hours can vary widely from country to country, creating another obstacle to exchanging currency. Many a traveler has frantically rushed to a foreign bank branch recommended by their hotel’s concierge, only to find the bank’s doors locked for the day. So while banks offer the “best bang for your buck,” it’s important to remember that even your friendly, local neighborhood bank branch includes a significant profit component in all of their consumer currency exchanges.

Money Brokers: The Exchange Specialists

Money brokers specialize in providing currency conversion services. Sometimes known as a “bureau de change” or a “casa de cambio,” the typical money broker deals in a wide range of currencies to accommodate the various needs of tourists and businesspeople. As in any free enterprise system, money brokers compete with each other, so comparing the exchange rates and fees offered by rival firms can often yield pleasant surprises.

Some money brokers and other financial firms offer express currency exchange services, by which a customer can receive foreign currency without ever leaving home. Upon receiving an order, the broker issues a pre-authorized Electronic Funds Transfer (EFT) request which deducts the exchange amount and all associated fees from the customer’s bank account. In the alternative, costs can also be charged to a credit card account in many countries. The foreign currency is then shipped to the customer by means of a secure, overnight delivery service. While the fees for such services are comparatively higher than most other forms of money changing, many consumers prefer the convenience of being able to have foreign currency delivered to their home or office before leaving on a trip.

Words To The Wise

All reputable money changers post their prevailing exchange rates where consumers can clearly inspect them. Use this fact to your advantage, and always shop competitors to make sure you get the best deal possible.

Take the time to gain a basic familiarity with a foreign currency before you actually end up handling it. There are numerous Internet resources available that include depictions of foreign currencies, as well as the denominations issued. The ability to count your change can be a very valuable skill when you need to make an exchange, and even with limited experience, you may be able to spot counterfeit bills.

Additionally, consumers should always ask for a printed receipt containing the details of their transaction. Not only does the receipt serve as a record for comparing rates of exchange and fees for future transactions, but the receipt may actually be required should you need to convert foreign currency back into your native currency. Many countries have limits on the amount of currency that can be converted upon departure, and without a valid receipt, you will have no means of being granted an exception to the rule, or of proving how you acquired a large amount of currency as a foreigner.