In today‘s globalized world, it‘s easier than ever to shop online from international merchants, hire freelancers overseas, and send money to friends and family abroad. But dealing with different currencies can get confusing and costly if you‘re not careful.
As one of the world‘s largest online payment platforms, PayPal offers a convenient way to send and receive funds across borders. But how exactly does PayPal handle exchanging currencies, and how much will it cost you? In this comprehensive guide, we‘ll cover everything you need to know about PayPal‘s currency conversion services.
How PayPal Currency Exchange Works
First, let‘s go over the basics of how PayPal exchanges currencies. When you have a PayPal balance in one currency and want to send money to someone in a different currency, PayPal will automatically convert the funds during the transaction process. The conversion happens in real-time using PayPal‘s current exchange rates.
The same applies if you receive money in a foreign currency. By default, PayPal will convert those funds to your primary currency before adding it to your balance. However, you also have the option to maintain balances and transact in multiple currencies.
It‘s important to note that PayPal‘s exchange rates are not the same as the base exchange rate you might see on Google or Reuters. Like banks and currency exchanges, PayPal adds a spread, or markup, on top of the base exchange rate as part of their fee.
According to PayPal, their currency exchange rate "is determined by a financial institution and is adjusted regularly based on market conditions." Essentially, PayPal takes the base exchange rate, or mid-market rate, and adds a spread of 2.5% to 4% to determine the retail exchange rate passed onto customers.
Here‘s an example of how that spread looks in practice:
- Base EUR to USD exchange rate: 1 EUR = 1.20 USD
- PayPal adds 4% spread: 1 EUR = 1.15 USD
- Effective exchange rate for PayPal user: 1 EUR = 1.15 USD
So in this scenario, exchanging currencies through PayPal would be about 4% more expensive than the base rate. The spread is how PayPal profits from offering currency conversion.
PayPal‘s Currency Conversion Fees Explained
Speaking of fees, let‘s dive into the costs of PayPal‘s currency conversion services. For most transactions, PayPal charges a flat fee between 3-4% above their base exchange rate to convert between currencies. This fee applies to:
- Sending payments for goods and services
- Sending money to friends and family internationally
- Receiving payments from another country in a foreign currency
- Withdrawing foreign funds to your bank account
However, there are a couple exceptions to the standard currency conversion fees:
- Buying goods or services from a merchant who uses PayPal‘s conversion process instead of their own bank: 3% fee
- Receiving money from friends and family in a foreign currency and the sender pays the fee: 3% fee paid by sender
Here‘s a breakdown of PayPal‘s currency conversion fees by transaction type:
| Transaction Type | Currency Conversion Fee |
|---|---|
| Sending payments for goods/services | 4% above base exchange rate |
| Sending international personal payments | 4% above base exchange rate |
| Receiving international payments for goods/services | 4% above base exchange rate |
| Receiving international personal payments (receiver pays fee) | 4% above base exchange rate |
| Receiving international personal payments (sender pays fee) | 3% above base exchange rate paid by sender |
| Withdrawing funds to non-local bank account | 4% above base exchange rate |
| Buying from merchant who uses PayPal‘s conversion | 3% above base exchange rate |
As you can see, PayPal‘s currency conversion fees are on the high side compared to many banks and international money transfer services. The World Bank found that the global average cost for sending remittances was 6.51% in Q4 2020, while PayPal‘s fees start at 4% for most transactions.
However, you‘re paying for the convenience of fast transfers and acceptance at millions of online merchants worldwide. For many consumers and small businesses, that convenience is worth the extra cost.
The Impact of PayPal‘s Currency Exchange on International E-commerce
As a retail and consumer expert, it‘s important to consider how PayPal‘s currency exchange policies impact the world of international e-commerce. Cross-border online shopping is booming—eMarketer predicts that 1.2 billion people worldwide will buy from foreign merchants in 2021, spending an estimated $963 billion.
PayPal is a major enabler of this global e-commerce activity. The company operates in over 200 countries and handles transactions in 100+ currencies. In Q4 2020 alone, PayPal processed $27.5 billion in cross-border payments (accounting for currency exchange), up 37% from the previous year.
For international shoppers, transacting through a trusted intermediary like PayPal offers peace of mind compared to sending money directly to an unknown merchant overseas. Buyers are protected by PayPal‘s dispute resolution process and can often get refunds if an item isn‘t delivered as described.
On the merchant side, accepting PayPal opens up a global customer base without jumping through hoops to accept foreign currency directly. An online store owner in France can seamlessly accept payments from customers in Canada, India, Australia, and beyond—all through a single PayPal account.
While PayPal‘s 4% currency conversion fee does take a notable chunk out of margins, it may be more economical than the alternative of maintaining multiple currency accounts and managing international wires.
Moreover, PayPal‘s widespread adoption and trust helps to boost conversion rates and average order values, especially for lesser-known brands. Research from PrestaShop found that small and medium e-commerce sites can double their checkout conversion rate by accepting PayPal.
So despite the fees, PayPal‘s currency exchange is a net positive for making international e-commerce more accessible for both shoppers and merchants. Over half of worldwide cross-border purchases are now paid for via digital wallets like PayPal—a trend that‘s likely to keep growing.
Tips for Minimizing PayPal Conversion Fees
While you can‘t avoid PayPal‘s currency conversion fees entirely, there are a few ways to minimize them as a picky consumer:
-
When possible, shop with foreign merchants who handle currency conversion themselves outside of PayPal‘s system. You may get a more favorable exchange rate and avoid PayPal‘s fees.
-
Maintain balances in the currencies you use most often to avoid paying conversion fees on every transaction. You‘ll still pay to convert the balance initially, but then it acts as a pre-paid balance in that currency.
-
When given the option at checkout, always choose to make the payment in the merchant‘s local currency rather than your home currency. This ensures the merchant‘s bank handles the conversion and avoids double conversion fees.
-
If you frequently send money internationally, consider opening a PayPal account in the foreign country and funding it by transferring from your bank to PayPal in that currency. Holding multiple currency accounts lets you lock in a favorable exchange rate.
-
For large transfers, check if you can get a better exchange rate from a dedicated transfer provider like Wise or OFX. The savings may be worth the extra steps to send money outside of PayPal.
-
Consider opening a multi-currency bank account that lets you hold and convert money between multiple currencies for lower fees than PayPal. Providers like HSBC and Citibank offer accounts for frequent travelers and expats.
PayPal‘s Xoom vs PayPal International Transfers
In addition to sending money through your regular PayPal account, the company also offers a separate service called Xoom for international money transfers. Acquired by PayPal in 2015, Xoom is a specialist in remittances—sending smaller sums of money to friends and family abroad.
The key differences between using Xoom vs PayPal for international transfers are:
- Xoom payments go directly to the recipient‘s bank account, cash pickup location, or home delivery. Regular PayPal payments go into the recipient‘s PayPal balance first.
- Xoom supports more payout methods in certain countries, like home delivery of funds in the local currency.
- Xoom has lower fees in some cases. While the exchange rate markup is similar to PayPal‘s, Xoom sometimes waives the additional transfer fee that PayPal charges.
In general, Xoom payments tend to be slightly cheaper and offer more flexible delivery options than using PayPal itself for remittances. It‘s worth comparing the fees and exchange rate between the two services for your specific currency route.
However, for shopping online or sending larger sums to other PayPal users, sticking with PayPal‘s core service is more convenient. Xoom is really optimized for person-to-person cash transfers rather than business transactions.
The Future of Digital Wallets and Currency Exchange
As digital wallets like PayPal continue to gain mainstream adoption, the landscape of currency exchange is evolving. Traditional banks are no longer the default for moving money across borders, as "fintech" disruptors offer faster, cheaper, and more user-friendly ways to transact globally.
The rise of mobile payments is making digital wallets an increasingly popular way to store and exchange funds, especially in developing countries. In China, for instance, Alipay and WeChat Pay handled $37 trillion worth of transactions in 2020—both offering seamless currency exchange.
At the same time, the emergence of cryptocurrencies like Bitcoin and Ethereum are challenging the very notion of traditional fiat currencies. While the volatility and regulatory uncertainty around crypto makes it impractical as a mainstream payment method today, that may change in the coming years.
For now, PayPal and other digital wallets that support fiat currency are acting as a bridge between the old world of bank-centric finance and this future of decentralized, digital-native money. By making currency exchange more accessible to the masses, they‘re accelerating the globalization of commerce and laying the groundwork for a more fluid approach to money.
Within that context, PayPal‘s currency conversion fees can be seen as the price of increased financial inclusion on a global scale. The company‘s reach allows people in almost every country to participate in the digital economy and transact across borders—even if that convenience comes at a premium.
As a picky shopper, the key is to be mindful of those costs and take steps to minimize them when possible. By understanding how PayPal‘s currency exchange works and watching out for alternative services, you can access the benefits of digital payments while keeping more of your hard-earned money in your pocket.
Key Takeaways
- PayPal automatically converts currencies when you send or receive money internationally, charging a 3-4% fee above the base exchange rate for most transactions.
- PayPal‘s currency conversion fees are higher than most banks and specialist transfer services, but are justified for many users by the convenience and global reach.
- You can minimize PayPal‘s currency conversion costs by maintaining balances in frequently-used currencies, shopping with merchants who don‘t use PayPal‘s conversion, and exploring alternatives like Wise for large transfers.
- PayPal‘s Xoom service offers lower fees and more flexible delivery options for remittances in some countries compared to using PayPal itself.
- The growth of digital wallets is making currency exchange more accessible worldwide and paving the way for a future where money moves more fluidly across borders.
Navigating the world of PayPal currency conversions can be daunting at first glance. But armed with knowledge of how the fees work and strategies to minimize them, you can take advantage of PayPal‘s massive network and e-commerce clout to transact globally while keeping costs under control.
In a world that‘s only becoming more interconnected, having a savvy approach to digital payments and currency exchange is an increasingly essential skill for consumers and businesses alike. Master the ins and outs of PayPal‘s currency conversion, and you‘ll be well on your way to becoming a confident citizen of the global economy.
