An exchange acts like a brokerage. A broker is a medium who buys or sells goods or assets for clients. You (the investor) uses their medium to buy and sell orders of cryptocurrencies. Major money is constantly in transit between the exchange and its clients. Orders for buying and selling happen all day.
   In the U.S, a individual, or business must have a money transmission license to deal in buying or selling fiat. The exchange usually has these legal matters squarely in order, not all the time though. The exchange makes the transactions smoother and faster, saving the investor the convenience of registering for licensing and other permits in order to exchange money, especially in large amounts.
    An exchange is a very necessary commodity!