What is currency conversion or currency exchange?
In simple terms, the exchange or conversion rates (also referred to as the forex rate, foreign-exchange rate, or simply FX rate) between two currencies imply the worth of one currency versus the other. For example, an exchange rate of 38 on the Indian Rupees (INR) against the United States dollar (USD, $) means that 38 INR is worth the same as USD 1.
The foreign exchange market is one of the biggest and the most powerful business markets in the world, where currency exchanges worth approx 2 trillion USD take place everyday.
How do banks decide on currency conversion rates?
Most banks declare the rates at which they’ve agreed to purchase or sell a country’s currency. The difference between these two rates is known as the “spread” which is equal to the trader’s gross margin. A larger spread implies a higher transaction cost, i.e., you pay more money for a given conversion.
The spreads on currencies that are exchanged less often can be quite high compared with the currencies belonging to other more popular economies such as Japan, the United Kingdom, Europe, Australia and the United States.
Since currencies rely on demand and supply, most banks don’t get as many requests for “rare” currencies which means they often need to stock the money before exchanging it, leading to an increase in the carrying costs.
Do all banks charge conversion fees on foreign transactions?
Most banks charge currency conversion fees for foreign transactions made with their debit and check cards, credit cards, and for ATM cash withdrawals.
Besides the standard 1 percent charge on foreign purchases by Visa and MasterCard, the issuing banks often charge an additional fee of their own making it twice as painful for the travelers!
How do I know I am getting the best currency conversion rate?
Stay informed. The only way for you to know if you are being offered the best currency exchange rate is to find out what the current conversion rate is. Do your research on the currencies of the countries you’re planning to visit and make an estimate of the expenses either by manually calculating the conversion,
Before leaving for your trip, it is important for you to check the latest currency exchange fees charged by your bank(s). Most American banks provide updated information on their foreign exchange rates on their website and often they may give discounts on foreign exchanges or wire transfers that do not involve cash bills.
Visa and MasterCard offer their collaborating banks a wholesale exchange rate on most foreign transactions. The card issuing banks are then free to choose what percentage of currency conversion fees they want to charge their customers.