Banks make money on the spread as well as charge certain fees...

Banks make money on the spread as well as charge certain fees for those transactions. Having a wider spread is like having a hidden extra fee.
Banks can buy the currency very close to the actual exchange rates so they set the spread at this rate on purpose to make money.

Smaller currency exchanges which charge no fees and have a smaller 1 cent spread on popular currencies I have often found save me 20 to 30 or so dollars when converting 500 dollars travel money compared to banks.

Yes they just rely on people seeing them as more convenient without researching better options. They also have things like travel cards and other products which get loaded at these rates so they rely on some internal sales due to their own customers and products.

Most of the big 4 banks have similarly large spreads.

Your Western Union transaction above would have also had some fees to do that transaction so the cost for that wasn't just the margin you mentioned but often I have found there are better options than banks for currency exchange.