The average money changer charges a client from ½% to 1½% for cashing a foreign check. Money changers call this a service fee but if the consumer analyzes what in fact is happening, they will realize that this transaction is in effect tantamount to a usurious loan that they might be able to avoid. Consumers don’t look at it this way because their average check is small, and the service charge seems negligible in comparison to the convenience a money changer offers them. Also, many consumers don’t know that they might have an alternative.
Service Charge or Interest Rate?
The first question that should come to mind is why do people run to money changers to cash their foreign currency checks in the first place? If you were in the U.S. and you received a $1,000 dollar check for your goods or services, would you run to your money changer to cash it for a fee or would you just deposit it? Do you cash the Israeli checks you receive at the money changer or do you deposit them at the bank? What is the rush to cash a foreign currency check and not deposit it?
If the consumer deposits their foreign check with a bank or institution and waits for it to clear, he can avoid paying 1% or more to his money changer. Let us suppose it takes a week for his foreign currency check to clear. By the consumer paying 1% to his money changer for an immediate cash advance against his foreign check, he is in effect borrowing cash for a week against his foreign currency check and paying 1% for a one week loan. This in fact translates to a 52% interest rate per annum (1% x 52 weeks in a year)! Even if the money changer charges the discounted rate of ½% to cash checks, the interest rate that the consumer is paying is still a whopping 26% per annum (1/2% x 52 weeks in a year). No one in their right mind would borrow money at this usurious rate if it was presented to them in this format.
Paying for Speed and Convenience
The problem is that money changers seem to be the only place one can go to in Israel to deposit a foreign check and get your money either right away or in a reasonable amount of time. If you don’t have a bank account in Israel you may not be able to deposit your check. If you have a bank account in Israel, your bank may allow you to deposit your foreign currency check with them but you would probably get a poor rate and wait weeks for your check to clear.
Suddenly the “loan” your money changer is loaning you does not seem that unappealing after all (even if it is). Also, money changers generally offer you the rate you are getting when you give them your check, allowing you access to a well-timed foreign exchange rate that you may not get if you deposited your check in the bank.
Exchange Rate Against the Service Fee
The consumer may think he is timing the market perfectly and running to the money changer to cash his foreign check when rates are up. However, the consumer mustn’t be misled as to what, in fact, the effective exchange rate is after he pays the 1% service fee to his money changer. For example, an exchange rate of 3.50 translates into an exchange rate of 3.465 after the 1% service fee. Not as appealing.