Why Your Exchange Rate Is Worse Than the One You Looked Up
A 3.5 percent spread on £2,000 quietly costs $89, and nothing on the receipt ever calls it a fee.
Quick answer: The rate you look up online is the mid-market rate, the midpoint between what banks buy and sell at, and nobody offers it to retail customers. Your provider adds a margin, usually between 0.5 and 4 percent, sometimes with a separate fee on top. Convert at the mid-market rate first, then compare that figure with the amount actually offered.
Look up pounds to dollars and you get one number. Change money and you get a different one. The gap is not an error and it is almost never labelled, which is why it pays to know how to measure it.
The rate you see and the rate you get
Say the mid-market rate is 1.27 dollars to the pound. A bank quotes you 1.2255 for £2,000. Multiply it out and you receive $2,451 instead of $2,540. The missing $89 is the spread. As a percentage it is 3.5 percent of the transaction, and no line on the receipt calls it a fee. The phrase most providers use is no commission, which is perfectly true and beside the point.
Pricing the spread in one step
Divide the rate you are offered by the mid-market rate and take it from one. 1.2255 divided by 1.27 is 0.965, so you are handing over 3.5 percent. Do it in money as well as percentages, because $89 tends to concentrate the mind more than 3.5 percent does. Run the same test on the second provider and pick on the difference.
Run your own numbers
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Open the Currency CalculatorThe fees that arrive after the rate
Cards add their own layer. A UK card with a non-sterling transaction fee of 2.75 percent turns a £600 hotel bill into £616.50. Cash machines abroad often charge that percentage plus a flat amount, so 2.99 percent plus £1.50 on a £200 withdrawal costs £7.48, which is 3.7 percent. Take out £50 instead and the same fees come to £3.00, or 6 percent, because the flat charge does not shrink with the withdrawal. Fewer, larger withdrawals cost less.
Then there is the card machine that offers to bill you in pounds while you are standing in a shop in Madrid. That is dynamic currency conversion, and the rate is set by the terminal rather than your bank. Always choose the local currency. Choosing pounds hands the margin to a third party you did not pick.
Airport desks and buy or sell boards
Exchange desks display two rates, one for buying a currency from you and one for selling it to you, and the mid-market rate sits between them. A wide gap between the two numbers is the whole business model, so it tells you what you need to know before you queue. Take the sell rate, divide by the mid-market rate, and decide whether the convenience is worth it.
Try it with your figures
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Use the Currency CalculatorHow to use the currency calculator
Enter the amount, pick the currency you hold and the currency you want, and treat the result as a benchmark rather than a quote. Currencies are listed by three letter code, so GBP for sterling, USD for dollars, EUR for euros. That figure tells you what the transaction is worth before anyone takes a margin.
The second calculation is the one people skip. Take the total your provider will actually hand over, and put it next to the benchmark. If the calculator says $2,540 and the bank says $2,451, the deal costs $89. For a card payment rather than a cash exchange, add the transaction fee to your amount before comparing, so a £600 booking on a 2.75 percent card is really £616.50 leaving the account.
If you are budgeting for a trip, run the conversion at a rate slightly worse than today's. Rates move, and a holiday budget built on the best rate of the month has no room in it. The mechanics of conversion and the recent behaviour of the dollar against the pound are both worth a look before you commit a large amount.
Common questions
What is the mid-market rate? It is the midpoint between the buying and selling prices in the wholesale market, and it is the rate quoted by search engines and financial news sites. It is a reference point, not an offer.
Should I pay in pounds or local currency abroad? Local currency, every time. Paying in pounds means the terminal converts it, and that margin is typically wider than the one your own card would apply.
Is cash or card cheaper? A card with no foreign transaction fee usually beats a bureau, because it settles close to the wholesale rate. A card charging 2.75 percent is roughly a tie with a decent exchange desk. Carry some cash anyway for places that will not take a card.
Why are the buy and sell rates different? That difference is how the desk makes money. It also covers the risk of holding notes that may be worth less by the time somebody buys them back.