“…what’s transpiring in the retail foreign exchange market is indicative of oligopolistic practices, not capitalism…” - TQC

Billions of dollars are at stake. The targets: The uninformed general public traveling overseas. The perpetrators: The monopolistic foreign exchange (FX) booths situated throughout airports and tourist hotspots & retail banks. No informed person would ever use an FX changing firm (or bank) to source foreign currencies if they had any idea how badly they are being fleeced, especially when an ATM provides far superior rates. Let us provide a window into the world of foreign currency exchange.

First, we must put the foreign exchange market into context. It’s by far the largest and most liquid market in the world. In fact, it dwarfs stock and bond trading. All major currencies trade against one another globally. Two common markets are the "spot" or current market and the "futures" market. Both markets are very liquid and offer buyers and sellers instantaneous access to foreign currency. In Friday's market for the $U.S. Dollar / Euro ($USD/EUR): One Euro could be bought for $1.1319 U.S. Dollars. Hence, the market for the $USD/EUR looked like this: Bid $1.1319 Offer $1.1320. The Euro could be bought for $1.1319 and sold for $1.1320, a difference of less than a penny. Furthermore, the amount of currency bid for and offered at these prices, just fractions of a penny wide, amounts to millions of dollars. Far more than any retail customer would ever seek to exchange at an airport kiosk or retail bank.

FX booths and bank branches sometimes offer to exchange foreign currency for "no commission." Instead, their take amounts to far more than a reasonable standard commission. This is what typically transpires: A foreign exchange booth or retail bank branch offers $U.S. Dollar / Euro but widens the market - the difference between the bid and the offer - out. The “markup” they take amounts to well in excess of any commission any broker could ever expect to make on any foreign exchange trade. For example, vs Friday's quoted current market, they might post that they would buy Euros for $1.02 and sell Euros at say $1.24 when the inside market (see above) is $1.1319 bid and $1.1320 offer. This is absurd. FX booths and banks are in essence locking in a ~10% markup from unsuspecting customers, possibly more, on a trades that should cost less than 1 penny to execute.

Let’s walk through it with a real-world example! An American tourist arrives back in the states after spending a week in Europe. She is anxious to exchange her remaining Euros back into U.S Dollars. She walks up to an FX airport kiosk to initiate a transaction. The merchant at the FX booth offers to exchange (or pay her) $1.02 U.S dollars per each of her Euros. Keep in mind, the current inside (best) market for $U.S. Dollar / Euro is $1.1319 bid and $1.1320 offer. But instead of receiving $1.1319 U.S. dollars per each Euro, she was only paid $1.02! What can the FX merchant do to “lock in” this excessive "markup"? Turn around and sell the Euros – that he just acquired from the tourist - on the market for what the bid really is, $1.1319, profiting the difference. The victim, instead of receiving ~$1.1319 for her Euros, was paid just $1.02 per Euro. We believe this represents an excessive mark-up and is categorically unjust.

Let us be clear, at The Quintessential Centrist we are proponents of a free market. Our view is that a profit motive is typically an impetus to provide good service. FX firms and banks are most certainly entitled take a fee and charge for their services. They have to pay employees, pay rent, keep cash on hand, maintain infrastructure, etc. All this cost money. That said, is it fair for an FX firm or a bank to take 10% of a customers’ money for facilitating this transaction? We do not believe so. It is unwarranted.

At a 2% or 3% markup, banks and FX kiosks would earn handsome profits. Even at 5% one might be able to make an argument for "fairness." But 10%? This seems patently unjustifiable. Also, fees are probably higher than 10% for less commonly exchanged currencies. TCQ are businesspersons but what’s transpiring in the retail foreign exchange market is indicative of oligopolistic practices, not capitalism. This should be, at the very least, stringently curtailed.

The Next Time You Are A Tourist, What Can You Do?

If travelling overseas do not use an FX airport kiosk or bank to source foreign currency. Instead, wait until you reach your destination. Once there, use a local ATM to obtain foreign currency. Withdraw as little cash as possible. If you run low, you can always go back to an ATM and get more. The rationale? When you return to the United States, you cannot use an ATM to exchange foreign currency back into U.S. dollars. If you have excess currency, you are left with two choices, the first of which is particularly suboptimal: Either exchange your foreign currency and accept a ~10% haircut – essentially receiving 90c on the dollar – or wait and use the foreign currency for trips in the future.

Those who comprehend the machinations of the retail foreign exchange market would never utilize an FX booth or bank to source foreign currency. A standard ATM machine will typically offer a rate relatively consistent with the current (spot) market. Unfortunately, very few people have intimate knowledge of foreign currency exchange. We hope this article serves as a foundation for insight and change.