How do money changers make money?

How money changers make money

Ever wondered how money changers make a profit? Wonder no further, because Get4x has the answer!

To get our heads around this oft asked question, we must understand the concept of the Bid-Ask Spread.  We mentioned it in passing in our blog post last year, but now we will explain it in greater detail. Buckle up!

The bid-ask spread is, simply put, the difference between the buying price and the selling price of a currency. Let’s take an example of a popular currency pair, the USDEUR. The following example takes place in America, so the base currency is USD.

Ben is an American traveling to Europe and wants to buy 1000 EUR. He sees the rates in the table above at Xchange Money Changers. The price under “we sell” refers to Xchange’s asking price per EUR in USD terms. That means Ben will have to pay 1.2*1000 = 1,200 USD to get 1000 EUR from Xchange.

Charlie, on the hand, is an American returning from Europe. He comes to Xchange to change back his leftover money, which happens to be 1000 EUR. The price under “we buy” refers to Xchange’s bid price per Euro in USD terms. This means that Charlie will receive 1,000*1.1 = 1100 USD in return for his 1000 EUR.

The difference between the two, is the bid-ask spread, and is the ultimate profit that the money changer makes. In this example, the difference is 100 USD. Although the amount is small, we have to remember that money changers deal with a lot more volume, so their ultimate profit will be larger.

For popular currency pairs like USDEUR, the bid-ask spread will be tighter. For lesser demanded pairs like the NZDCHF (New Zealand Dollar vs Swiss Franc), or exotic currencies, the spread can be a lot wider, meaning more profit for the money changer.

Money changers can manipulate the spread based on the level of demand. In times of high demand, spreads will tend to be smaller and vice versa.

We hope that clears up a bit of confusion over how money changers earn their keep.

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