Yes, banks convert currency, but the exchange rate they give you is not the market rate

Banks do convert one currency into another. When you exchange dollars for euros at your bank, or send money abroad and the recipient receives it in a different currency, a bank is doing the conversion. But the rate they use includes a markup — sometimes a large one — on top of the actual market price of that currency on any given day.

The exchange rate is the price of one currency in terms of another. On financial markets, the euro might trade at 1.10 dollars per euro. Your bank might offer you 1.05 dollars per euro when you buy euros, or 1.15 when you sell them back. That gap — the difference between what they pay and what they charge — is how banks make money on currency conversion.

You pay this markup whether you realize it or not. It appears as a worse exchange rate, a separate fee labeled "currency conversion fee," or both. The total cost varies by bank, by currency pair, and by how much money you are converting.

Key Takeaways

  • Banks convert currency at a rate that includes their markup, which is usually 1 to 3 percent worse than the mid-market rate you see online.
  • The markup can appear as a worse exchange rate, a separate fee, or both — read your receipt to see which.
  • International wire transfers, credit card purchases abroad, and ATM withdrawals in foreign countries all involve currency conversion, each with different markups.
  • Comparing rates across banks and using services outside the banking system can reduce what you pay, though not all options work for all situations.

Where the markup hides: exchange rates versus fees

A bank's currency conversion cost comes in two forms, and you need to see both to know what you are actually paying.

The first is the exchange rate spread — the difference between the rate the bank pays for a currency and the rate it charges you. If the mid-market rate (the rate banks trade with each other) is 1.10 dollars per euro, a bank might buy euros from you at 1.08 and sell them to you at 1.12. You lose money on both sides of that spread.

The second is an explicit currency conversion fee, which some banks charge as a flat dollar amount or a percentage of the transaction. A bank might charge you $15 to convert currency, or 2 percent of the amount you convert. Some banks do both — a worse rate and a fee.

When you look at your receipt or statement, you may see only the final amount in your new currency. To find out what you actually paid, you have to work backward: divide the amount you received by the amount you sent, and compare that rate to the mid-market rate you can find on XE.com or OANDA for that same day. The difference is your cost.

Currency conversion at the ATM, on credit cards, and in wire transfers

Banks convert currency in different ways depending on how you move the money, and each method has a different cost.

ATM withdrawals abroad: When you withdraw cash from an ATM in another country, your bank converts the local currency to dollars (or vice versa). You pay the bank's exchange rate spread plus sometimes a flat fee per withdrawal — often $3 to $5. Some banks also charge the ATM operator's fee on top. The total cost is usually 2 to 4 percent of what you withdraw.

Credit card purchases abroad: When you buy something in euros with a dollar credit card, the card issuer converts the price to dollars. The conversion happens days after the purchase, at whatever rate the card company chooses that day. Most card issuers charge 1 to 3 percent on top of the mid-market rate. Some cards marketed to travelers charge less or nothing.

International wire transfers: When you send money to another country, your bank converts your dollars to the recipient's currency and sends it through the banking system. The conversion rate includes a markup, and you may also pay a wire fee ($15 to $50 depending on the bank). The recipient's bank may charge a fee too. The total cost can be 2 to 5 percent or more of the amount sent.

In-person currency exchange: If you walk into a bank branch and ask to buy foreign cash, you pay the bank's exchange rate spread plus sometimes a separate fee. This is usually the most expensive way to convert currency — often 3 to 5 percent worse than mid-market.

How to find out what your bank charges

Your bank is required to disclose its exchange rate and any fees before you complete a transaction, though the disclosure may be small or buried in a confirmation screen.

For a wire transfer, ask your bank for the exchange rate and all fees in writing before you send the money. For an ATM withdrawal, the ATM should show you the rate and ask you to confirm before dispensing cash — do not skip this step. For a credit card purchase, check your statement a few days later to see the converted amount and work backward to find the rate used.

Once you know what your bank charges, compare it to the mid-market rate for that currency pair on that day. If your bank's rate is more than 2 percent worse than mid-market, you are paying more than typical.

Alternatives that may cost less

Banks are not the only way to convert currency. Other services exist, though not all work for every situation.

Specialist money transfer services like Wise (formerly TransferWise), OFX, and Remitly focus on international transfers and often charge less than banks. They publish their exchange rates openly and charge a flat fee rather than a hidden markup. For sending money abroad, these services often cost 1 to 2 percent total, compared to 3 to 5 percent at a bank.

Credit cards with no foreign transaction fee can reduce the cost of purchases abroad. Some cards charge nothing on top of the mid-market rate, or charge a flat 1 percent. If you travel often or make regular purchases in foreign currency, switching to such a card saves money over time.

Prepaid travel cards let you load multiple currencies onto a card before you travel. The exchange rate you lock in depends on the card issuer, but some offer rates close to mid-market. These work well if you know in advance how much of each currency you will need.

Local banks in the country you are visiting may offer better rates than your home bank, especially for large amounts. If you are moving abroad or staying long-term, opening a local account can save thousands in conversion costs.

For small amounts — a few hundred dollars or less — the difference between services may be only $10 to $20. For large amounts or frequent conversions, the choice matters more.

What happens when you convert currency through a bank

Understanding the steps helps you see where the markup sits.

When you send an international wire transfer, your bank takes your dollars, converts them to the recipient's currency at its chosen rate, and sends the converted amount through the banking system (usually through SWIFT, the international banking network). The recipient's bank receives the money and deposits it in the recipient's account. Each bank in the chain takes a cut — your bank through the exchange rate spread, and sometimes the recipient's bank through a receiving fee.

When you use a credit card abroad, the merchant's bank sends the transaction to your card issuer with the price in local currency. Your card issuer converts it to dollars at its chosen rate and charges your account. You do not see the conversion happen in real time; it appears on your statement days later.

When you withdraw cash from an ATM, the ATM's bank converts the local currency to your home currency at its rate, deducts any fees, and sends the rest to your bank. Your bank then deducts its own fee and charges your account.

Frequently Asked Questions

Can I lock in an exchange rate before I travel?

Some banks offer forward contracts that let you lock in a rate days or weeks in advance, but this is usually only for large amounts (often $10,000 or more) and comes with a fee. For most travelers, it is not worth it. Prepaid travel cards let you lock in a rate by loading currency before you leave, which works for smaller amounts.

Why do banks charge different rates for buying versus selling currency?

The spread between the buy and sell rate is how banks make money on currency conversion. They buy low and sell high, just like any other business. The wider the spread, the more you pay. Banks with more currency trading volume can afford narrower spreads.

Is the exchange rate on my credit card statement the same as what the merchant charged?

No. The merchant charged you in their local currency. Your card issuer then converted that amount to dollars at its own rate, which may be different from the rate you saw in the store or on the receipt. The rate your card issuer uses is usually 1 to 3 percent worse than mid-market.

Do I have to use my bank to convert currency?

No. For international transfers, you can use services like Wise or Remitly instead. For purchases abroad, you can use a credit card with no foreign transaction fee. For cash, you can withdraw from ATMs in the country you are visiting, though you still pay a conversion fee. Your options depend on what you are trying to do.

What is the mid-market rate and where do I find it?

The mid-market rate is the rate at which banks trade currency with each other — the true market price with no markup. You can find it on XE.com, OANDA, or Google (type "1 USD to EUR" and it shows the mid-market rate). Use this to compare against what your bank or card issuer charged you.