Currency conversion: which exchange rate actually applies
The rate a converter shows you is almost never the one your bank applies. Here is how to measure the gap for yourself.
You type “1 pound in dollars”, a number appears, you write it down. Three days later the card statement says something else: the debit comes in 2 to 4 per cent higher than the converter suggested. The converter did not lie — it showed you a reference rate, the one at which banks trade currencies with each other. Nobody is going to sell you dollars at that price.
Mid-market, bid and ask
On the foreign exchange market, a pair such as GBP/USD has two prices at once: the one at which a dealer will buy (bid) and the one, always higher, at which they will sell (ask). The rate published by converters, search engines and the financial press sits midway between the two: the mid-market rate, sometimes called the interbank rate. It is an average, not an offer.
The gap between that midpoint and what you actually get has a name: the FX margin, or spread. It almost never shows up as a separate fee line; it is baked into the rate itself. Hence the only reliable way to measure it: compare the amount actually debited with the theoretical amount.
A worked example. You pay USD 250 abroad. Say the mid-market rate is 1.2650 dollars to the pound, which makes £197.63 in theory. The card debits £203.20. The gap is £5.57, or 2.8 per cent: that is your real FX margin, every charge included. The percentage calculator works that ratio out in a single entry, and the figure it returns tells you more than any published fee schedule.
“Real time”: what the phrase actually covers
The currency market runs without a break from Sunday evening to Friday evening, handed on in turn between Sydney, Tokyo, London and New York. It closes at the weekend: a rate you look up on a Saturday is, at best, Friday’s close. If you deal with counterparties several time zones away, the time zone converter places the opening or closing of a given centre against your own clock.
Alongside that continuous market sit fixed daily series. The European Central Bank publishes euro reference rates every working day, in the afternoon; the Bank of England puts out its own daily spot rates. These are the figures accounting software and finance teams work from. They are not “real time” rates: they are once-a-day readings, and there are none on bank holidays.
The vast majority of free converters rest on a table of that sort, refreshed periodically. Convertu’s currency converter is no exception: it shows the date of the rates it used underneath the result, and flags a table that has gone stale with a visible warning. A converter that gives no date is a converter you cannot check.
Decimal places, rounding and ISO 4217 codes
The three-letter codes are not a house convention: they come from ISO 4217, which also fixes the number of decimal places proper to each currency. This is where a great many conversions come off the rails.
| Currencies | Decimal places | What happens if you ignore it |
|---|---|---|
| EUR, USD, GBP, CHF… | 2 | The standard case, nothing to watch for. |
| JPY, KRW, CLP, ISK… | 0 | Most converters, Convertu’s included, show two decimal places whatever the currency. Round the figure yourself before carrying a yen amount into a document. |
| KWD, BHD, OMR, TND | 3 | The error stays under 0.005 of a unit per amount, but it repeats on every line of an invoice: the totals stop adding up. |
Second source of drift: the order of operations. A rate table is always expressed against a pivot currency — the euro, in Convertu’s case. Converting Mexican pesos into Thai baht therefore means two calculations in a row: MXN to EUR, then EUR to THB. Each step can introduce a rounding. The rule is simple: round once only, right at the end, and keep at least six decimal places in the intermediate steps.
A third trap, quieter than the others: very small amounts. Converting £3 into Vietnamese dong or Indonesian rupiah gives you a five-figure number; the other way round, a handful of dong comes to £0.0001. A display locked to two decimal places then returns “0.00”. That is not a calculation error, it is a presentation error — but it gets copied into a quotation just as readily as a real one.
What costs more than the rate itself
Dynamic currency conversion at the point of sale
Abroad, a card terminal or an online checkout will sometimes offer to charge you “in pounds” rather than in the local currency. That is dynamic currency conversion. The rate applied is chosen by the merchant and its payment provider, not by your bank, and it is almost always the worse of the two. The right answer is to decline and pay in the currency of the country: the conversion is then handled by your card network, at a rate a good deal closer to mid-market.
Cash machine withdrawals
A withdrawal stacks three layers: the exchange rate, a fee from the operator of the machine, and possibly charges from your own bank. The last two often include a fixed component, which punishes small repeated withdrawals. And a machine advertising “no commission” generally makes it back on the rate.
Pegged, controlled and abolished currencies
Not every currency floats freely. Some are pegged to the euro or the dollar at a fixed parity; others sit under exchange controls, where an official rate and a parallel rate exist side by side — a converter knows only the first, and the gap between them can be wide. Then there are codes that outlive the currencies they stood for: the Croatian kuna (HRK) still appears in plenty of tables even though Croatia moved to the euro on 1 January 2023, at a final conversion rate of 7.53450 kuna to the euro. To restate an older invoice, that fixed rate is the one to use, never a market quote.
Converting for an invoice or for the books
The moment a converted amount becomes the basis of an official document, approximation gets expensive. Three habits:
- Pin the date. The applicable rate is the one for a specific date — invoice, payment or return, depending on the regime — and not the one for the day you happen to do the sum.
- Use a published source. Tax and customs authorities work from official rates, and not always daily ones: HMRC publishes monthly exchange rates for customs and VAT purposes, while the ECB reference rates play that part in the euro area. An online converter is an estimating tool, not a source anyone will accept as authority.
- Keep the trail. Record on the accounting document itself the rate you used, its date and where it came from. That is what makes the figure reproducible six months later, when nobody remembers the calculation.
Watch the order of conversion and tax as well. On an invoice you convert the net amount and then apply the VAT rate of the country concerned — not the other way round, and certainly not by working back from a gross figure calculated in another currency. The VAT calculator lets you redo the operation in the right direction and check that net, tax and gross agree — it works in euros, its preset rates are euro-area ones, and anything it does not list goes in as a custom rate. Whatever the currency, hand it amounts you have already converted.
When a converter is no longer enough
A converter answers one question: “roughly how much is that, today”. It does not answer the ones below.
- How much will actually land in the recipient’s account? An international transfer sometimes passes through intermediary banks that each take their cut. The answer depends on how charges are shared under the arrangement with your bank, not on the rate.
- What rate will I be paid at in three months? Nobody knows. For a forward commitment it is a hedging instrument that fixes a rate, not a conversion done today.
- Which channel should I use for a large amount? Above a few thousand pounds, the difference between two providers runs into tens or hundreds of pounds. Compare on the final amount received, never on the advertised rate or on a “0% commission” badge.
And be wary of screenshots of rates passed round between colleagues: with no date or time on them they are worth nothing. Run the sum again yourself.
Convertu’s currency converter covers 53 currencies and does the arithmetic in the browser: only the rate table is downloaded, and the amounts you type reach no server. It copes with a decimal comma pasted out of a continental document as well as a decimal point, and with spaces used as thousands separators; it shows the unit rate (1 X = n Y) under the result, automatically raises the precision below one unit, and dates its rates. That is exactly what you want from an estimating tool — provided you remember that between the estimate and the debit there is always a middleman.