How Do Currency Exchangers Make Money?

If you have ever exchanged your native currency for a foreign one when you have been preparing for a holiday, then you may have wondered how the currency exchange industry works or how currency exchange businesses earn a profit.

The foreign currency exchange market is certainly vibrant, with various businesses and individuals operating side by side. On the one hand, you have Forex traders, who speculate on the behavior of particular currencies as they buy and sell them for profit. Underpinning them, you have the Forex platforms and brokers these traders use to complete their transactions. 

Last, but not least, you have the currency exchangers we are discussing here. These companies should not be confused with forex traders or brokers because they fulfill different purposes. 

Currency exchangers, currency brokers, money transferrers, or foreign exchange brokers operate by transferring money from one country to another for their customers. This is what you need to know about currency exchangers and how they make money.

What is a currency exchange?

A currency exchange is a licensed and regulated company that allows clients to exchange one currency for another. This can either happen in person with physical money or online with credit or debit card payments (or, more recently, cryptocurrency). 

Overall, online-based exchanges tend to be cheaper and more transparent, which is worth bearing in mind if you are looking to transfer money. If you are interested in using a currency exchange, then consider trying Currency API

How do currency exchangers operate?

To buy or sell a particular currency, you would need to visit an in-person currency exchange or go online to a specialist provider. You then need to select the currency you wish to exchange and pay in the currency you want to use.

This sounds obvious (given that you would always need to pay in a currency to get a different currency back). Still, if you are a regular traveler who requires a batch of different currencies, the ability to choose your exchange currency pair is useful. 

The exact amount of currency you can receive as part of the transaction will depend upon the international spot rate at that particular time. This spot rate is the daily charging value of the currency, which is decided upon by a collection of international banks that all trade in that currency.

Exchange fees

The primary way currency exchanges make their money is through exchange rates. Every currency exchanger will set their own exchange rate for particular currencies. So, you shouldn’t rely upon one bank or broker’s exchange rate as an indicator of what other companies offer.

The exchange rates represent the markup that the broker pockets for providing their service. This is similar to almost all other business models, but the difference is that exchange rates fluctuate constantly. 

In fact, it is not uncommon for exchange rates to change every few seconds, which is why you should always do your research beforehand and look closely at what the current exchange rate is. 

Transfer fees

Another key way that currency exchangers make money is through transfer fees. 

This is a straightforward enough process. Every time an individual wants to transfer their money from one currency to another, the exchanger will charge a transaction fee. Unlike the constantly changing exchange rates, transfer fees are usually a fixed amount and are charged in addition to the exchange rate. 

Transfer fees can also be incurred if you decide to skip the currency exchanger and instead use your card to pay on holiday. This can even happen both ways on some occasions – by paying an additional fee for the sending and receiving bank. 

Bid-Ask Spreads

Another way currency brokers can make money off exchanges is through bid-ask spreads. This term means the difference between the price an exchanger will buy and sell a currency for.

The bid price is what a broker is willing to buy the currency for, while the asking price is what they are willing to sell it for. These spreads can vary from broker to broker, so it is worth asking what the best rates are at any one time and searching around for the best option to get the best deal.

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