Foreign Exchange Rate
What is foreign exchange rate?
Foreign exchange rate (FX rate) is the price of one currency expressed in another – the amount of one currency it takes to buy a single unit of another. If EUR/USD is quoted at 1.08, one euro buys 1.08 US dollars.
Rates move constantly as supply and demand for each currency shift. In payments, the FX rate decides how much a customer pays in their home currency when they buy from a merchant priced in a different one, and how much the merchant receives once the currency is converted.
Key facts
- Also called: FX rate. The wider market where currencies are traded is the foreign exchange (forex) market.
- What it measures: the value of one currency in terms of another.
- Quoted in pairs: every rate has a base currency and a quote currency, written as a pair such as EUR/USD or GBP/JPY.
- Mid-market (interbank) rate: the wholesale rate banks trade at among themselves, before any markup.
- Retail rate: the interbank rate plus a margin added by a bank, , or .
- Why it moves: shifts in supply and demand driven by interest rates, inflation, trade flows, and geopolitical events.
How exchange rates are set
Most quoted rates start from the mid-market rate, also called the interbank rate – the midpoint between the buy and sell prices that large banks trade at. It's the cleanest reference point, but a customer doesn't pay it directly.
When a bank, card scheme, , or converts a payment, it adds a margin on top of the interbank rate. That margin is how the converting party earns on the exchange and covers its own currency risk. The result is the retail, or customer, rate – the one a cardholder actually sees.
The gap between the interbank rate and the retail rate is the markup. The wider it is, the more the conversion costs the customer and the less transparent the price. Two conversion points are common in card payments:
- At the card scheme: when the cardholder's currency differs from the merchant's, the scheme converts using its own daily rate plus any fee.
- At checkout: with , the customer is offered a charge in their home currency, with the rate and markup set by the merchant's provider rather than the scheme.
What affects exchange rates
- Interest rates: higher rates tend to attract foreign capital and lift a currency's value.
- Inflation: currencies in lower-inflation economies generally hold their value better over time.
- Trade and capital flows: strong exports and inbound investment raise demand for a currency; persistent deficits weaken it.
- Sentiment and geopolitics: elections, conflict, and policy shifts move rates as traders reprice risk.
- The markup applied: for the rate a customer actually pays, the margin added by the bank or provider matters as much as the underlying market rate.
Why it matters in payments
For merchants selling across borders, the FX rate sets two things at once: what an international customer pays in their own currency, and how much lands in the account after conversion and .
A wide or hidden markup raises the customer's total and can push up cart abandonment when the converted price looks higher than expected. On the merchant side, the rate applied at settlement determines real revenue per sale, so the same list price can produce different payouts depending on when and where conversion happens. Showing the rate and any conversion fee before a customer confirms keeps the charge predictable and cuts over unexpected amounts.
