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Foreign currency explained: A guide to holiday cash

Updated on June 24, 2012

Many people are confused when buying currency. Most will simply order at their local bank. This a short guide as to how it works, how to spot a bargain and the most cost effective way to purchase foreign currency. Also I will explain why “no commission” is a misleading notion.

When I went on holiday I was so confused as to why there are so many different rates o f exchange? Was I better taken cash or traveller cheques or perhaps simply use my cards abroad. As it turns out I’m not the only one who was confused.

Why are the rates I see on the news different to those on the high street?

Let’s address the first issue. When you see on the news the value of the dollar or the value of the euro it tends to be vastly different to what you see on the high street or even at the banks. Why is this? Well, in short the value on the news is a theoretical value. Even the big currency wholesalers pay more than the hypothetical value. We mustn’t think currency is any different than a can of fizzy pop. It would not be viable to exist as a business to sell Pepsi Cola, for example, at the same rate as you’d buy it from a wholesaler. Like wise, what would be the point of manufacturing it if it was only going to be sold for the cost of production? There are additional costs: labour, transport, the maintenance of premises etc. Currency, as with any other commodity cannot be teleported to the end user and thus it cannot be sold for its theoretical value.

Another important point is that currency will not be cheaper at the bank. This is chiefly because the banks possess the largest market share in currency sales and as a result can demand bigger margins. Whether this is right or wrong is another debate but its traditional macro economics. A confusing factor in all of this is that banks manage the sales of currency to smaller competitors at a vastly reduced wholesale rate. This is because they make more money managing businesses than they do from a consumer. The existence of other currency vendors means more profit.

There are two distinct strategies pricing currency.

· The first is at a percentage over value. This means the value with be X and the price to the consumer maybe value plus 3%. This is known as the profit margin. Seems obvious to say but when you consider that all currency is sold “commission free” it’s not 100% true. The margin varies depending on the company but generally speaking most move between 2% to 5% on their sell rates for their major one (euros and dollars).

· The second is an ad hoc strategy which is influenced by local competition and the negotiating of the consumer. Thomas cook and Thompson’s now widely use this.

Why are there different buy and sell rates?

On the rate boards perhaps you may have noticed next to the currency there are two rates: a buy and a sell rate. Lets use the Euro as an example, the euro sell rate might be 1.15 but the buy rate 1.2. This means the for every £1 you will get 1.15 euros but its cost 1 euro to get 1.2 euros. There is a significant higher profit margin for companies buying back currency as opposed to selling it. This is just a feature of the market in the UK and it is highly prejudicial against those holidaying from abroad.

What’s better cash or Travellers ‘Cheques?

If you are ultra cautious then travel cheques are handy as they can be replaced in the event of theft or loss. That said they are not good value for money as many companies charge extra to cash them. Also, with the exception of the United States, most countries will not allow you to cash them in shops and restaurants. Indeed in some holiday destinations you might find it difficult to cash them period.

Cash is cash; if you lose it then it would be reasonable to assume it is lost. However you won’t encounter and an issue spending it assuming it is local currency. Plus you’ll get face value so your holiday money won’t be wasted in administrative costs.

If you’re going to a non industrialised country or one with poor infrastructure I strongly recommend taken a few hundred in traveller cheques as well as cash. Remember traveller cheques are insured and replaced whilst you’re on location so it offers a level of protection should something unplanned happen.

Where is best to get my currency?

As implied above, avoid the banks for holiday cash. Shop around smaller bureau outlets as they offer the best rates. The best direct value is online as they don’t have to pay for premises, rent and rates etc. Be mindful of postage and card charges as this can cancel out the better rate.

Tips

Never buy/see at airports as they know the can maximise profits and offer very bad rates.

Sign travel cheques as soon as they are purchased.

Buy travel cash at least a week in advance, especially if you are going to a less popular destination. It is not possible for all bureaus to stock every single currency so they might have to order them in.

Search for value as you might be surprised how much more you can get. Thoroughness could buy you a free meal.

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