You might think that after a thrilling vacation where you visited a European country, everything is going to be expensive. After all, it’s in another country. But what if I told you that some countries offer better rates on currency exchanges than others?
In the past, when traveling abroad for vacations or business trips, you’d have to exchange currency at currency exchanges or currency transfer services. These currency exchanges or currency transfer services are usually found in airports, shopping malls, banks, and gas stations.
Currency exchanges are businesses dedicated to exchanging currencies. The only reason someone wants to exchange money is to buy something from another country where the money used is not their own.
In the past, before the global economy became strong, you would have been charged a hefty fee for doing a foreign currency exchange or transferring money abroad. But now that the economy has become more substantial and interconnected, currency exchanges and transfers have become more manageable.
The Mechanics Behind Currency Exchanges
Currency exchanges usually happen when you buy something from a foreign country using your credit card or debit card. But for your purchase to be successful, someone (usually a currency exchange business) must complete the transaction. It is done by accepting your card and paying the foreign seller with your local currency.
For example, if you are in the U.S., you can purchase goods from Italy using a credit or debit card. The merchant that sold you the product is paid with U.S. dollars. Someone (usually a currency exchange business) has to convert your U.S. dollars to euros to complete the transaction successfully.
It is also true when transferring money from one currency to another currency. For example, suppose you are sending money from your U.S. bank account to Italy so that someone can purchase goods in euros. In that case, a currency exchange business must complete the transfer by converting your U.S. dollars to euros for the transfer to be successful.
Currency exchanges are more popular nowadays because of online shopping and digital goods (e.g., eBooks, music, movie downloads). Although you can buy products directly from an Italian or French seller, most merchants like Amazon or Apple, who sell digital goods, only accept certain currencies.
How Currency Exchanges & Transfer Fees Work
Before you sign up for a currency exchange or transfer service, you should know that these services typically include hidden fees and extra charges. Some of these additional charges can be as high as 4-8%. On average, the best currency exchanges and transfer services cost around 2-4% per transaction.
What Makes Up These Fees?
On your credit card statement, some fees you will see are called “foreign transaction fees.” This fee is usually around 3% of the total amount being sent, transferred, or exchanged. The other fees are primarily for processing and administrative purposes. In addition, some companies also include a small “profit” fee in their exchange rates. The thinking behind these additional fees is that because they are converting your money into another currency, they should be able to make a profit from the transaction. According to the experts at SoFi, “If you’re opening an account at an online bank, opening an account online may be your only option.” So, if you want to know can you create a bank account online, give them a call.