Currency conversion — Definition Explained Simply | Examples & Role
Currency conversion — is the process of exchanging one currency for another at the applicable exchange rate during payments, transfers, or international transactions.
Currency conversion is the exchange of funds from one currency into another at the current exchange rate. It is used for international payments, bank transfers, foreign exchange operations, travel abroad, and investments in foreign assets. The purpose of conversion is to enable settlements between countries with different currencies and to preserve the value of money in cross-border transactions.
Currency conversion can take place at banks, exchange offices, or on financial markets, and it may also happen automatically during cashless transactions — for example, when paying abroad with a bank card. The conversion rate depends on market supply and demand for a currency and may vary depending on the location and time of exchange.
Types of Currency Conversion
- Direct conversion — exchanging one currency directly for another (e.g., euros for US dollars).
- Cross conversion — exchanging through a third currency (e.g., euro → dollar → yen).
- Automatic conversion — performed during card payments abroad at the rate of the bank or payment system.
- Dynamic Currency Conversion (DCC) — allows the cardholder to choose the transaction currency directly on the payment terminal when abroad.
Factors Affecting the Conversion Rate
- Market exchange rate and fluctuations on the Forex market.
- Bank or exchange office fees.
- Payment system rates (Visa, Mastercard, etc.).
- Time and location of the transaction.
Examples
- A traveler exchanges euros for US dollars before a trip.
- A bank converts a client’s funds from dollars to pounds sterling for an international transfer.
- Payment abroad with a card where currency conversion occurs automatically.