Why do money exchangers give different rates to different bills?

Question

I was traveling to India recently and was buying a few hundred US dollars on my way as the money exchanges didn't have any Indian rupees with them. At the exchange counter, they didn't have 100 dollar bills and they asked me if I would like to check other exchange places for 100s saying I would get a lower rate when I buy Indian rupees selling my US dollars in India if they were 50s, 20s etc.

Back in the airport in India, I overheard a foreigner arguing with the exchange counter guys asking why he was given a lower rate for low valued notes. They replied saying different rates applies for different notes.

Why do they offer lower rates for low valued dollar bills (50, 20, 10, 5, 2, 1) and the displayed value is offered only for 100 dollar bills? Is there any economical aspect to this and does it happen everywhere with every other bill?

Answer 1

When dealing with currency exchanges, it's important to remember that only the local currency is "money", all the other currencies are just "things".

This is the reason behind the "buying"/"selling" terminology you often see. When you change foreign currency into local currency - in the view of the currency exchange - they are buying your strange pieces of paper with fancy writing on it for actual (local) money. And when you're changing local currency back into foreign currency, they are selling you fancy pieces of paper for real (local) money. (This viewpoint extends even for electronic transactions. It might not be a physical artifact, but it's still some "non-monetary" electronic claim, like a transferable airline e-ticket or shares of company stock.)

So to directly answer your question, the reason there's a different rate on different bills is because, as non-("real")-money objects, they're non-fungible. One US$100 bill and five US$20 bills may be very similar, but they're not the same, and can't be freely interconverted by someone in India.

It's similar to when you go into a grocery store and they sell a 2 kg package of rice for a different price than two 1 kg packages (and a different price again for 2 kg of rice from a bulk bin). It's the same amount of rice, but due to the economics of obtaining and storing the two 1 kg packages versus the one 2 kg package, as well as the different rate at which the 1 kg packages are bought versus the 2 kg packages, the store sets the price differently such that they maintain a decent profit while not having extra packages languishing on the shelves.

Likewise with the money exchangers. They have some non-("real")-money commodity (US$100 and US$20 bills), and even though five US$20 bills are the equivalent amount of "rice" as one US$100 bill, there's different economics in obtaining and storing a US$100 versus the US$20. There's also differences in the desirability of a US$100 versus five US$20s. As such, just like the grocers changing the price of the different packages of rice (or bulk rice), the money exchangers may change the price of US$100 versus US$20 (or electronic transfers).

Answer 2

Because it is physical money. They need to handle it. And they may simply not be able to as easily and as efficiently offload 5 USD bills compared to 100 USD bills. Result is a different pricing structure.

Answer 3

It sounds like the money exchanger is making up a reason why you're not getting the advertised rate, independently of the notes that you actually have on you. So they're basically scamming you. That's not exactly unheard of, especially on airport locations.

It helps to shop beforehand to find the best rates. Some locations even offer to lock in the rate, if you contact them shortly before you leave and agree on the amount you'll exchange. That makes sense from a business perspective; you only need to offer competitive rates to customers which shop around for the best rate.

Answer 4

I can't say specifically for India, but in many countries (I have personal experience of this in Uganda), the official exchange rate for small bills is intentionally set lower, to discourage the use of US dollars in favour of the local currency.

Answer 5

Cash is king. And the king of cash is a 100 dollar bill minted by the US Federal Reserve, which is quite possibly the hardest currency note in the world to counterfeit.

It's not different rates for different denominations. It's more like: there's 100 dollar bills and there's not 100 dollar bills.