# How does currency conversion work? Currency conversion sells one currency and buys another at an exchange rate: the mid-market rate plus the provider's margin and fees. Here is the mechanism. --- Currency conversion is a sale of one currency and a purchase of another at an agreed exchange rate, and a business never converts at the rate it sees on a news screen: it converts at the mid-market rate moved against it by a margin, with fees on top. Whoever does the converting (your bank, an intermediary, the receiver's bank or a card network) sets that margin, and the party who chooses the currency of the payment decides who that will be. Every rate in the examples below is illustrative. The market statistics and the legal rules come from the bodies that publish them, named where they are used. This is general information, not financial advice.
$9.6 trilliontraded per day in foreign exchange markets in April 2025, according to the Bank for International Settlements
89.2%of those trades had the US dollar on one side, which is why most pairs are priced through it
2 business daysis the limit within which a trade counts as spot in the same survey

Bank for International Settlements, Triennial Central Bank Survey of over-the-counter foreign exchange turnover, April 2025, published September 2025, and its reporting guidelines.

## What is an exchange rate? An exchange rate is the price of one currency expressed in another: the number of units of the second currency that one unit of the first will buy or cost. It is a price like any other, set by buyers and sellers, and it moves throughout the trading day. Because it is a price, it always has a direction. A euro quoted at 1.0800 dollars and a dollar quoted at 0.9259 euros are the same rate read from each side, since one divided by 1.0800 is 0.9259. This is why professionals always state the pair along with the number. A rate is also tied to a moment and to a counterparty. The figure on a public screen indicates where the wholesale market was a moment ago; the rate on your payment is a firm price from one institution, for your amount, at the moment you accept it. ## How do you read a currency quote? A currency quote names two currencies and two prices: the first currency is the base, the second is the quote currency, the bid is the price at which the dealer buys the base currency, and the ask is the price at which the dealer sells it. The mid-market rate is the point halfway between the bid and the ask. Take a wholesale quote of EUR/USD 1.0798 / 1.0802. The euro is the base currency and the dollar is the quote currency: the figures are dollars per one euro. The dealer will buy a euro from you for 1.0798 dollars and sell you a euro for 1.0802 dollars. The mid-market rate is 1.0800. The difference between the two prices is the spread. Here it is 0.0004, or four "pips", a pip being the fourth decimal place in most pairs. Against the mid rate of 1.0800 that spread is about 0.04%. On a conversion of €180,000, one pip is worth $18. Two reading rules follow, whatever the pair: - You always deal on the side that is worse for you. Selling euros, you receive the lower price; buying euros, you pay the higher one. - The mid rate is a reference, not a price anyone trades at. A quote with one number only is the price for one direction, with the margin already inside it. ## Where do exchange rates come from? Exchange rates come from the interbank market, a decentralised wholesale market in which banks, dealers and large institutions quote prices to each other electronically, with no single exchange and no single official price. The rate published at any instant is a summary of the prices at which those participants are dealing. The size of that market is measured every three years by the Bank for International Settlements, which collects figures from central banks around the world. Its Triennial Central Bank Survey for April 2025, published in September 2025, put average turnover in over-the-counter foreign exchange markets at $9.6 trillion per day, up 28% from the $7.5 trillion recorded in the 2022 survey. Outright purchases and sales for near-immediate delivery, called spot trades, accounted for $3 trillion of that daily figure; the largest instrument was the foreign exchange swap, at $4 trillion. That depth is the reason wholesale spreads in the main pairs are so narrow. It is also why a business cannot deal directly at those prices: the interbank market trades in large amounts between institutions that have credit lines with each other, and a business reaches it through a provider that buys wholesale and sells retail. Central banks also publish reference rates, and these are often confused with market prices. The European Central Bank publishes euro foreign exchange reference rates for a list of currencies on working days, set through a daily procedure among European central banks around 14:10 Central European Time and released around 16:00. The European Central Bank states that the rates are published for information purposes only and strongly discourages using them for transactions. They are a daily snapshot, and European Union disclosure law uses them as a yardstick. ## What rate does a business actually get? A business gets the mid-market rate moved against it by a margin, and then pays any fixed fees separately. The margin is a percentage built into the rate; the fees are amounts that appear as their own lines, or are deducted from the payment on the way. The margin is where most of the cost of a conversion sits, and it does not appear on a statement as a charge: the statement shows the rate applied and the amount debited, and the gap to the mid rate is left for you to compute. The margin pays for real things. The provider gives you a firm price while the market keeps moving, and carries that risk until it has covered the position. It delivers a currency it has to hold or source, through accounts it maintains with banks in other countries. It screens the payment under sanctions and anti-money-laundering rules. A small conversion costs the provider nearly as much to process as a large one, which is why margins are usually wider on small amounts and narrower on large or regular ones. Why a bank's standard rate sits where it does, and what spreads cost on a cross-border payment, are subjects of their own; what matters here is the structure of the price. Fees come in three places: a fee from the sending institution for the transfer, deductions by intermediary banks along the route, and a fee from the receiving bank for crediting an incoming international payment. None is a conversion charge, but each changes what arrives. ## How do you compute the margin from a quote? The margin in a quote is the difference between the mid-market rate and the rate you are offered, divided by the mid-market rate, taken at the same moment. Multiplied by the amount, it gives the cost of the conversion in money. A worked example, with illustrative rates. A company holds euros and must pay a supplier invoice of $180,000. The mid-market rate is 1.0800 dollars per euro. Its provider quotes 1.0584.
Computing the margin in a quoteWorked example: a $180,000 invoice paid from euros, mid-market rate 1.0800, quoted rate 1.0584, illustrative
  1. Fix the mid rate at the time of the quoteNote the mid-market rate for the pair at the minute you receive the quote: 1.0800 dollars per euro. A mid rate from the morning is no use against an afternoon quote.
  2. Check the directionThe company is selling euros to buy dollars, so a rate below the mid is against it: each euro buys fewer dollars. The quote of 1.0584 is below 1.0800, as expected.
  3. Compute the margin on the rate1.0800 minus 1.0584 is 0.0216. Divided by 1.0800, the margin is 2.00%.
  4. Turn both rates into eurosAt the mid rate, $180,000 costs 180,000 divided by 1.0800, or €166,666.67. At the quoted rate it costs 180,000 divided by 1.0584, or €170,068.03.
  5. Read the costThe conversion costs €3,401.36 more than the mid rate would. That is 2.04% of the mid-rate amount: slightly more than the 2.00% margin, because the margin was taken on the rate and the cost is paid in the currency being sold.
  6. Add the fixed feesAdd the transfer fee and any deduction expected along the route to reach the full cost of getting $180,000 to the supplier.
A margin can be measured on the rate or on the amount paid, and the two differ slightly; what matters is to compare every quote with the same method. The simplest is the one in the fourth step: ask every provider how many euros will leave the account for the supplier to receive exactly $180,000, fees included, and compare the answers. ## Who converts the money in a payment, and when? The conversion is done by whichever institution first has to move the money in a currency other than the one it received, and that is decided by the currency in which the payment is sent. There are four possibilities: the sender's bank or provider, an intermediary bank, the receiver's bank, or a card network. **The sender's side converts** when you instruct a payment in the receiver's currency. You hold euros and send dollars: your bank or provider sells you the dollars at its rate when you confirm the payment, and dollars travel. You see the rate before you commit, and the receiver gets a known amount, less any fees on the route. **The receiver's bank converts** when you send your own currency to an account held in another one. You send euros to a dollar account: the euros arrive, and the receiving bank converts them at its own rate on the day it credits the account. Neither of you agreed that rate in advance. **An intermediary converts** less often, when a bank in the chain must change the currency to pass the payment on. The rate is that bank's, and neither end sees it until the money arrives. **A card network converts** when a card is used in a currency other than the one the card account is held in. The network applies its own rate for the day it processes the transaction, which may be a day or two after the purchase, and the card issuer usually adds a percentage fee of its own on top. When each side of a deal wants a different currency, or when a payment risks being converted twice, agreeing in the contract which currency moves and who converts settles the question before the invoice is issued. ## What is dynamic currency conversion at the point of sale? Dynamic currency conversion is an offer, made on a payment terminal, a cash machine or an online checkout, to charge a foreign card in the cardholder's home currency instead of the local one. If the cardholder accepts, the conversion is done on the spot by the merchant's payment provider at its rate, instead of later by the card network and the card issuer. What the service gives is certainty: the amount on the screen is the amount that will be debited, in a currency the cardholder recognises. What it costs is the mark-up inside the rate offered, which is set by the provider of the service. An illustrative comparison shows what to check. An employee settles a €1,200 hotel bill with a company card held in dollars. At a mid rate of 1.0800 the bill is worth $1,296.00. If the terminal offers to charge in dollars at a rate carrying a 4% mark-up, the debit is $1,347.84. If the employee pays in euros and the card's own conversion costs 1.5% in total, the debit is $1,315.44. The difference is $32.40 on one bill. The method is to compare the percentage shown on the terminal with the percentage your card issuer publishes. Neither choice is wrong in itself: a cardholder whose card carries a high foreign-currency fee can come out ahead by accepting the offer. The choice is made in a few seconds at a counter unless a company's expense policy has made it in advance. ## What does European Union law require a provider to disclose? In the European Union, Regulation (EU) 2021/1230 on cross-border payments requires payment service providers to disclose currency conversion charges before a payment is made: as a percentage mark-up over the European Central Bank's reference rate for card transactions, and as an estimated total for online credit transfers. For card-based transactions, Article 4 of the regulation requires providers of conversion services at a cash machine or point of sale to express the total currency conversion charges as a percentage mark-up over the latest available euro foreign exchange reference rates issued by the European Central Bank, and to disclose that mark-up to the payer before the payment is initiated. They must also show the amount to be paid in the payee's currency and the amount in the currency of the payer's account, and tell the payer that paying in the payee's currency, with conversion by the payer's own provider, is possible. The payer's own provider has duties too. It must publish its mark-up on an accessible electronic platform, and send the payer an electronic message with that information without undue delay after receiving a card payment order in another Union currency, and once in every month in which it receives such an order in the same currency. Users can opt out of these messages, and the regulation allows the parties to agree that the message requirements do not apply where the payment service user is not a consumer. For credit transfers, Article 5 applies where the payer's provider offers the conversion for a transfer initiated online through its website or mobile application. Before the transfer is initiated, the provider must communicate the estimated total amount of the transfer in the currency of the payer's account, including any transaction fee and any currency conversion charges, and the estimated amount to be transferred to the payee in the payee's currency. One published daily rate thus serves as the yardstick for every provider's mark-up, so two offers can be compared as two percentages. The regulation applies within the European Union; other jurisdictions have their own disclosure rules, and a provider outside the Union is not bound by this one. ## Why does a spot conversion take two business days? A spot conversion takes up to two business days because the trade and its settlement are two separate events: the rate is fixed on the trade date, and the two currencies are delivered on the value date, which market convention sets two business days later in most pairs. The Bank for International Settlements defines a spot transaction in its survey as an exchange of two currencies at a rate agreed on the date of the contract for value or delivery within two business days. The gap exists because a conversion settles in two countries. The euros move through the euro payment system during European hours and the dollars through the dollar system during American hours, and each bank needs time to confirm the trade and issue instructions. Business days are counted in both currencies. A trade agreed on a Thursday has a value date of the following Monday, and a public holiday in either country pushes the value date back again. The convention is set pair by pair, so ask your provider for the value date of your own pair when timing matters. A value date beyond two business days makes the trade a forward. A forward contract fixes today the rate for a conversion that will take place on a set future date, at the spot rate adjusted for the interest rate difference between the two currencies over the period. It is the usual answer when a deal is priced now and paid weeks later. ## How are rates for currency pairs without the dollar worked out? A rate between two currencies that are not directly traded in size is a cross rate, computed from each currency's rate against a common third currency, almost always the US dollar. The Bank for International Settlements found the dollar on one side of 89.2% of all foreign exchange trades in April 2025, against 28.9% for the euro and 16.8% for the yen. The arithmetic is a multiplication or a division. With one euro at 1.0800 dollars and one dollar at 150.00 yen, one euro is worth 1.0800 times 150.00, or 162.00 yen. For less traded pairs, the cross is also how the conversion is carried out. Converting between two smaller currencies generally means selling the first for dollars and buying the second with dollars. Two trades mean two spreads. If each leg carries a margin of 0.5%, the two together cost just under 1.0% (0.9975%), and the wholesale spread in each leg is wider than in a main pair to begin with. ## How do pegged and controlled currencies convert? A pegged currency converts at a rate its central bank commits to defend against an anchor currency, and a controlled currency converts only through channels, and for purposes, that its authorities allow. In both cases the rate is no longer set by the market alone, and the practical questions move from price to access. The International Monetary Fund classifies exchange rate arrangements by how firm the commitment is. Its categories of anchored arrangements run from countries with no separate legal tender, which use another country's currency outright, through currency boards, to fixed pegs and crawling pegs, with or without bands around a central rate. Currencies outside these arrangements float to varying degrees. For a business, a credible peg makes conversion against the anchor currency predictable from one month to the next. Conversion against any third currency still moves, because the anchor itself floats: a currency pegged to the dollar rises and falls against the euro with the dollar. Controls change more than the price. Where a currency cannot be freely bought or sold, a conversion may need supporting documents such as an invoice or a contract, may be limited to licensed banks, and may be available only inside the country, so the foreign party cannot hold or hedge it. Before quoting a price in such a currency, check with a bank active in that country what can be converted, by whom and with what paperwork. ## What rate applies at weekends and on holidays? At weekends the interbank market is closed, so there is no live mid-market rate: a provider that converts on a Saturday or Sunday uses a rate based on the last close, and usually widens its margin to cover the risk that the market reopens at a different level. On a public holiday in one of the two countries, the market for the pair is thinner and settlement in that currency waits for the next business day. The wider weekend margin is a price for risk: a provider that gives a firm rate on Saturday cannot cover its position until trading resumes. Some providers queue the order for the reopening instead. Reference rates stop as well. The European Central Bank does not update its euro reference rates on days when the Eurosystem's payment system is closed, so a mark-up measured against them over a weekend is measured against Friday's rate. For a transfer of any size, the simple discipline is to convert during the hours when both currencies' markets are open, when spreads are at their narrowest. ## What does the same conversion cost four ways? The same conversion can cost several times more by one route than by another, because the margin differs with who converts and on what terms, while the fixed fees weigh heavily on small payments and hardly at all on large ones. Take the $180,000 supplier invoice again, paid from euros at a mid-market rate of 1.0800, which makes the invoice worth €166,666.67 before any cost. Four routes are compared, each with an illustrative margin and fee: the bank's standard rate for an online transfer; a rate agreed by phone or platform with the bank's dealing desk for that amount; a specialist currency provider; and sending euros so that the supplier's bank converts on arrival, grossed up so that the supplier still receives the full $180,000. | Route | Margin and fee | Rate applied | Euros paid in total | | --- | --- | --- | --- | | Bank standard rate | 2.50% + €25 | 1.0530 | €170,965.17 | | Rate agreed with the bank's desk | 0.50% + €25 | 1.0746 | €167,529.19 | | Specialist currency provider | 0.25% + €10 | 1.0773 | €167,094.38 | | Receiver's bank converts | 3.00% + €25 | 1.0476 | €171,846.31 | Against the mid-rate value of the invoice, the four routes cost €4,298.50, €862.52, €427.71 and €5,179.64. On the last route the sender does not know the receiving bank's rate in advance, so the gross-up is a guess and any shortfall leaves the invoice underpaid. The margins above are illustrations, not market averages, and the order of the routes is not a ranking of institutions. The standard rate is the price of convenience on an occasional payment, and a bank brings things a margin does not measure, such as an existing relationship, credit and the ability to deliver difficult currencies. The fixed fee does not shrink with the amount. The chart puts the same four routes side by side for a $2,000 payment and for the $180,000 invoice, as total cost in percent of the mid-rate value.
Total cost of a conversion by route and by sizeMargin plus fixed fee, as a percentage of the mid-rate value, for a $2,000 payment and a $180,000 payment from euros at 1.0800; illustrative margins and fees
$2,000 payment$180,000 payment
Bank standard rate 2.50% + €25 3.91% 2.58% Bank desk rate 0.50% + €25 1.85% 0.52% Specialist provider 0.25% + €10 0.79% 0.26% Receiver's bank 3.00% + €25 4.44% 3.11%

Illustrative worked example. Excludes deductions by intermediary banks and any fee charged by the receiving bank for crediting the payment. A desk rate is not normally available for a payment as small as $2,000; it is shown at the same margin to isolate the effect of the fee.

On the $2,000 payment, a €25 fee alone is 1.35% of the amount, more than the margin on two of the four routes. On the $180,000 invoice the same fee is 0.015% and the margin is nearly the whole cost. A business making many small foreign payments should therefore look first at fees and at grouping payments, and a business making a few large ones should look first at the rate, ask for a quote on the amount, and write down the mid rate at the minute the quote arrives.