What is a currency exchange office?
A bureau de change is a licensed business that allows customers to exchange one currency for another. The exchange of physical currency (coins and paper notes) is usually done at the counter of an ATM, which can be found in various places such as airports, banks, hotels and resorts. Money changers make money by charging a nominal fee and through the bid-ask spread in a currency.
Also known as a “bureau de change” or “casa de cambio”, a bureau de change should not be confused with the foreign exchange (forex) market where traders and financial institutions conduct currency transactions.
Key points to remember
- Bureaux de change are businesses that allow customers to exchange one currency for another.
- Money changers can be found in physical locations, such as banks or airports, but are increasingly common online.
- Exchange fees vary so much that credit card fees may be lower than fees paid through adjusted exchange rates.
How a currency exchange office works
Foreign 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 US dollars and want to exchange them for Australian dollars, take your US dollars (or your bank card) to the exchange office and buy Australian dollars with them. The amount you would be able to buy would depend on the international spot rate, which is basically a daily changing value set by a network of banks that trade currencies.
The money changer will change the rate by a certain percentage to ensure that they make a profit on the transaction. For example, suppose the spot rate for exchanging US dollars for Australian dollars is 1.2500 for the day. This means that for every US dollar spent, you can buy 1.25 Australian dollars if traded at the spot rate. But the exchange office can change this rate to 1.20, which means you can buy 1.20 Australian dollars for 1 US dollar. With this hypothetical rate change, their fees would effectively be 5 cents on the dollar.
Since the transaction is not conducted at the spot rate and depends on the profit the exchange wants to make, consumers may find it cheaper to incur ATM or credit card fees at the foreign destination, rather than using the 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.
Currency convertibility is essential in a global economy and essential for international trade and finance. An inconvertible currency poses significant barriers to trade, foreign investment and tourism.
Where to find an exchange office
Foreign exchange businesses can be found in a variety of forms and locations. This can be a small stand-alone business operating out of a single office, a larger chain of small currency exchange counters at airports, or a large international bank offering currency exchange services at its counters.
Airports are commonplace for currency exchange, allowing travelers to purchase the currency of their travel destination immediately before departure or to exchange any excess cash into their local currency upon return. Because airports are considered the last port of call, airport exchange rates will, in general, be more expensive than those at a bank in the departure city.
Cashless is becoming more common as some banks offer cards that can load multiple currencies with little or no charge. Additionally, offshore ATMs are a viable option for those doing business with a global bank. For example, HSBC ATMs are widespread in Europe, North America and Latin America, Asia, the Middle East and North Africa.
Currency exchange services can also be found through companies that offer these services online. This may be offered as part of the services provided by a bank, forex broker or other financial institution.
When traveling outside your own country, watch for country-specific fees. For example, before July 2020, Cuba charged a 10% tax on tourists buying Cuban Convertible Pesos (CUC) with US dollars.
Retail Forex Bid-Ask Spreads
Money changers make their money by charging customers a fee for their services, but also by taking advantage of the currency’s bid-ask spread. The bid price is what the dealer is willing to pay for a currency, while the ask price is the rate at which a dealer will sell the same currency.
For example, Ellen is an American traveler visiting Europe. The cost of buying euros at the airport can be shown as follows:
1 EUR = 1.30 USD / 1.40 USD
The highest price ($1.40) is the cost of buying each euro. Ellen wants to buy 5000 EUR, so she will have to pay 7000 USD to the dealer.
Suppose also that the next traveler in line returns from his vacation in Europe and wants to sell the euros he has left. Katelyn has 5,000 euros to sell. She can sell the euros at the bid price of $1.30 (the lowest price) and would receive $6,500 in exchange for her euros.
Due to the gap between supply and demand, the kiosk dealer is able to make a profit of $500 on this trade (the difference between $7,000 and $6,500).
When faced with a standard bid and ask price for a currency, the higher price is what you would pay to buy the currency and the lower price is what you would receive if you were to sell the currency.