Currency conversion is necessary for international travel, online shopping, money transfers and investments. Understanding how exchange rates work and the difference between the interbank rate and the rate applied by banks or exchange offices helps save money on every transaction.
The exchange rate expresses the value of one currency relative to another. There are two types of rates: the interbank rate (reference rate between major banks, also called the market rate or 'mid-market' rate) and the retail rate (rate applied to individuals, including a provider margin of 1–5%). Traditional banks often apply the highest margins. Services like Wise, Revolut or PayPal apply the interbank rate with more transparent fixed fees.
📐 Formula
Converted amount = Original amount × Exchange rate | Provider margin = (Retail rate - Interbank rate) / Interbank rate × 100
📊 Reference table
| Provider | Rate type | Typical margin | Fixed fees |
|---|---|---|---|
| Traditional bank | Retail | 2–4 % | Variable |
| Airport exchange office | Retail | 5–10 % | Often included |
| Wise (transfer) | Interbank | 0.35–1 % | Fixed per band |
| Revolut (within limit) | Interbank | 0 % | $0 |
| PayPal | Proprietary retail | 3–4 % | Included |
💡 Practical examples
Example 1: trip to Europe, exchange $500 to euros
Interbank EUR/USD rate = 1.08. Bank rate (3% margin) = 1.112. Bank: 500 / 1.112 = €449.6. Wise: 500 / 1.08 - €3 fee ≈ €460. Difference: €10.4 more with Wise.
Example 2: e-commerce sale in EUR, converting to USD
Sale of €150. EUR/USD = 1.08. PayPal (3.5% margin): 150 × 1.08 × (1 - 0.035) ≈ $156.4. Wise: 150 × 1.08 - $2 ≈ $160. Difference: ~$3.6 per transaction.
Example 3: understanding currency pairs (EUR/USD = 1.08)
EUR/USD = 1.08 means: 1 euro = 1.08 dollars. To buy euros with dollars: $1,000 / 1.08 = €925.9. To buy dollars with euros: €1,000 × 1.08 = $1,080.