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The operation of an exchange bureau - here and abroad

Prague money exchange offices are often discussed in the media in fairly negative terms. Is Prague
the only European city where tourists pay commission on money exchanges? What is the situation in
the centres of other popular destinations in Europe? Is it time to ‘put the record straight?’

In the Czech Republic, where ‘money changers’ in the days during and just after the end of Communism
were regarded with huge suspicion, international foreign exchange companies have had an ongoing
battle in some areas of the media and the general public to explain what is, after all, a highly-regulated

In every country, there are many different companies operating on the money exchange market, in just
the same way as any other service business. These money exchange companies can be anything from
one-off operations to major global brands such as Travelex, Global Exchange, ICE or Interchange, but all
have to be regulated by the National Bank of the country in which it operates, the only exception being,
of course, the old style ‘money changers’ that still walk the streets of some cities and are definitely not
to be trusted.

When you look at foreign exchange boards in the heart of Rome, Barcelona, Paris and other capitals, it is
clear they all operate in a very similar way to those in Prague; you may find one-off, volume-driven
foreign exchange offices with favourable exchange conditions, but the majority of the reputable foreign
exchange offices on prime streets, main railways stations and airports, charge commission or a fixed fee
per transaction, or, in some cases, both. And just as in Prague, where such a practice is often criticised,
customers can agree better conditions individually, but elsewhere this is regarded as a popular and
beneficial practice.

The major international foreign exchange companies incur huge running costs; in just the same way as
any other service business, they pay high rent for offices in prime locations, and pay large heating and
electricity bills in each of their properties, particularly when they offer a 24-hour service. They also need
to ensure the ongoing secure transportation of funds between the cash offices and the banks, employ
and train bilingual staff, cover taxes, legal and accounting fees, carry out their marketing, etc, etc. And
in just the same way as any other service business, they also have to buy-in products: i.e. in order to be
able to change your money from one currency to another, the currency exchange provider has to ‘buy’
the currency from the bank in the first place. It is hardly surprising, therefore, that they all, irrespective
of where they operate, have to make some form of margin on all of their transactions.

In addition to the above, in the Czech Republic, in particular, the cost of compliance with legal
regulations has risen significantly. Over the years, money exchange businesses have been more and
more regulated in order to prevent the possibility of them engaging in money laundering. With the
introduction of new AML regulations, FX companies operating on a licence must follow strict rules which
requires complicated and accurate record-keeping and the reporting of any suspicious transactions,
hence a very high increase in administration costs. Unfortunately, these rules do not apply to shops that
change money by accepting Euros but then giving back the change in Czech crowns. An example of a
similar service but with different regulations applied.

It goes without saying, therefore, that to be able to pay all of the running costs the foreign exchange
operator needs to have enough margin on each transaction and enough transactions to pay the bills
and, of course, to make some profit (since money exchange companies are no different to any other
service business!). And this is where the whole perceived issue with money exchange companies
arises, since unlike banks (who make their profits from providing a range of different services with very
high rates of interest (loans, mortgages, etc) and, yes, currency exchange), foreign exchange companies
focus purely on the exchange of currency.

Volume-driven foreign exchange companies can sometimes afford to offer favourable exchange
conditions, as they can reach their targeted revenue through very small margins on huge numbers of
transactions, but those with a lower volume must charge commission or fees, or have a larger spread
rate. Having said that, it is also the case that foreign exchange offices in central, tourist populated
locations, will need to charge a higher rate of exchange (for the reasons listed above) but this is no
different to all the other service suppliers in such locations: no matter whether it is in Prague, Madrid or
Rome, tourists will pay a fortune for a bottle of water or coke, or a cup of coffee, compared to the same
purchase in the outskirts, but most customers accept that they are paying for the convenience.

In general, most currency exchange offices in Prague and elsewhere are happy to offer better rates on
larger transactions, but in the Czech Republic, they cannot display anything other than their least
favourable rates on their FX boards. By law, better rates can only be agreed individually with customers.
Other Czech National Bank requirements that are “stricter” than most other countries, include, for
example, the display/provision of all information in both Czech and English and the requirement for
customers to agree in writing to the transaction conditions by signing a so-called „Information provided
before an exchange transaction is made“ paper. (However, since the number of controls carried out by
the authorities are limited, some less reputable companies avoid giving out this information and/or
receipts and, as a result, break the law.)

The Czech foreign exchange offices offer by far the most transparent display of their FX rates compared
to any other European cities. In Barcelona or Madrid, you can come across rate boards only in Spanish;
in Italy it is hard to tell whether rates are for “sell” or “buy” and commission and fees per transaction are
almost invisible, and in no other country are customers obliged to review and sign an agreement as to
the terms of the exchange. Unfortunately, it is this same transparency that causes some customers to
complain about the rate; perhaps if it wasn’t even shown, they wouldn’t actually mind (in no other
country is there such a persistent criticism of foreign exchange offices than here in the Czech Republic!
As in any other businesses all over the world, there are volume-driven businesses with wholesale prices
existing next to convenient nonstop locations where the service is more expensive. Each will usually find
its own customers, and the price is not the only thing that decides whether it is an honest business or
not., Prague 13.02.2018


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