How Exchange Rates Work
An exchange rate is the price of one currency expressed in terms of another. Exchange rates fluctuate constantly based on supply and demand in the foreign exchange (forex) market — the largest financial market in the world with over $6 trillion traded daily.
Types of Exchange Rates
Mid-Market Rate (Interbank Rate)
This is the "real" exchange rate — the midpoint between the buy and sell prices in the global currency markets. It's the rate banks use when trading with each other. Most consumer services do not offer this rate.
Retail Rate
The rate offered to consumers, which includes a markup or margin above the mid-market rate. This markup is how exchange services make their profit.
Spot Rate vs Forward Rate
The spot rate is for immediate exchange, while forward rates are for exchanges scheduled in the future at a pre-agreed rate.
Understanding the Costs
When exchanging currency, the total cost typically includes:
The Exchange Rate Margin
The difference between the mid-market rate and the rate you're offered. This is often not explicitly stated but can be the largest cost.
Transaction Fees
Fixed or percentage-based fees charged per transaction. Some services advertise "no fees" but compensate with wider margins.
Minimum/Maximum Limits
Some services have minimum or maximum transaction amounts, which may affect the effective rate for your specific needs.
Delivery/Collection Fees
Additional charges for delivery of physical currency or specific collection methods.
Types of Currency Exchange Services
Online Transfer Services
Services like Wise, Revolut, and CurrencyFair typically offer rates closest to the mid-market rate with transparent, low fees. Best for: Bank-to-bank transfers, especially for larger amounts.
High Street Bureau de Change
Physical locations where you can exchange cash. Convenient but typically more expensive than online alternatives. Best for: Last-minute physical currency needs.
Banks
Traditional banks often offer the widest margins and highest fees. Convenient for existing customers but rarely the most economical option. Best for: Very large transfers requiring personalised service.
Airport Exchanges
Generally the most expensive option due to convenience premiums and captive customers. Best for: Emergencies only.
Tips for Getting the Best Rate
- Compare multiple providers — Rates vary significantly between services
- Look beyond the rate — Consider all fees, not just the exchange rate
- Plan ahead — Online services typically beat last-minute airport exchanges
- Consider the amount — Some services are better for small amounts, others for large
- Check for rate locks — Some services let you lock in a rate in advance
- Avoid dynamic currency conversion — When abroad, always pay in local currency
Factors Affecting Exchange Rates
- Interest rates — Higher rates typically strengthen a currency
- Inflation — Lower inflation usually means a stronger currency
- Political stability — Uncertainty weakens currencies
- Economic performance — Strong economies attract investment
- Trade balances — Export-heavy economies often have stronger currencies
- Market speculation — Trader sentiment can move markets
Regulatory Information
In the UK, currency exchange services are regulated by the Financial Conduct Authority (FCA). Before using any service, you can verify their registration on the FCA register.
Note: This website provides comparison information only and is not a regulated financial service.
Questions?
If you have questions about currency exchange or our comparison service, please contact us.