If I google the exchange rate from one currency to another, it shows a much better rate than what I would get in a bureau de change for the same amount of money. Why are these two rates so different?
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The official rate is the rate when buying/selling millions of dollars of currency on the foreign exchange (ForEx), where currency trades like stock. But that’s not the real world rate for small quantities that a tourist would exchange.
The retail money exchange places need to make money to operate the business! By adjusting the exchange rate slightly from the true rate, they make revenue from that spread. Say an exchange rate is 1.5:1, they might only give 1.4:1 for selling the currency and 1.6:1 when buying back, making 0.1 on each unit exchanged. And that’s the business’ money to pay rent, pay employees, etc.
Per-transaction fees are one way to make money. This is another way — rate spread. Charging per transaction is good when your business is high volume, but small dollar-value transactions. Charging a spread is good when your business is lower-volume, but higher-dollar transactions.
Currency futures are the news/internet rates. They are mostly for large banks trading millions of dollars with each other. They’re kind of like wholesale rates.
Currency exchange places are boutique businesses that trade less volume at higher prices (or in this case spreads.
Think of some tourist trinket, from the factory it might sell for $0.25 each but at a hotel or airport gift shop it’s going to cost $7.99 and if you scout around you might find a bigger store selling them for $3.99. Currency exchanges are similar, but we publish the factory prices globally.
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