TransferWise: Send Money Abroad Cheaper and Faster

TransferWise and the Challenge of Cheap International Money Transfers

In a globalizing world, money transfer services between different institutions are happening at a high volume every day. Banks control an important share of the money transfer market. However, exuberant charges and poor exchange rates offered by banks result in individuals and businesses losing large amounts of money in the long-term. As a response to that, London-based startup TransferWise bases its business model on the advantages of the peer to peer (P2P) system and new technology to help costumers send money abroad cheaper and faster.

“We charge a very small and transparent fee with every transfer. Typically, we’re charging 10 times less than a bank does – we’re really focusing on how to make it cheaper for the user,” says TransferWise co-founder Taavet Hinrikus.

Transfering Money Abroad Made Easy

Launched in 2011, TransferWise is a money sending firm that lets you buy currency from someone else. How does it work? The system used by the firm matches your payment with that of someone else’s going in the opposite direction. For instance, if you want to make an international payment from pounds to dollars, TransferWise will convert your pounds into dollars at the mid-market exchange rate (the one released daily on Google, Reuters, XE.com) and match it with someone who wants to make a transfer from dollars to pounds. In that way, your money is given to someone in the same country, who is being sent the same amount of money from someone overseas.

Thanks to the P2P system, TransferWise doesn’t charge foreign exchange fees, which makes their service much cheaper. The company charges only 0.5 percent for their commission in the U.K., a huge difference from the 5 percent that banks collect via their commissions and other hidden charges. TransferWise helps customers save up to 89 percent of transfer fees. The company claims it has helped customers save more than $50 million in fees in the U.S. where it started operations in February.

TransferWise is the brainchild of former Skype employee Taavet Hinrikus and his friend Kristo Kaarmann. The two Estonian men came up with the idea after experiencing the hassle of foreign exchange operations through banks.

Hinrikus worked as strategic Director of Skype in Estonia. After he moved to the U.K., he still received his salary from skype in Euro and had to convert it into pounds to be able to spend it in the U.K. He was charged about 5% for the conversion of his salary.

Fees and More Fees

Living and working in London, Kaarman was paid in pounds and also had to pay high fees to send money for bills in Estonia.

The two entrepreneurs were annoyed by the situation and came up with a solution: Hinrikus would deposit Euro into the Kaarman Euro account, and taking into consideration the real mid-market exchange rate, Kaarman would put the exact same amount in pounds into Hinrikus British account. They did not have to pay any bank fee and could, therefore save a significant amount of money.

Inspired by that private currency trade, the two men decided to create a business that would help people not to be “ripped off by banks” and other money transfer institutions.

“For too long, legacy providers’ dominance of the market has allowed consumers to be hoodwinked into paying huge hidden charges for services as basic as currency exchange,” says Hinrikus.

The two founders of TransferWise, Source: Business Insider

Indeed, banks have been criticized for poor exchange rates – they do not use the mid-market exchange rate, but set their own rates-, high money transfer fees, and long processing, which affect small businesses’ import and export operations. According to a report released by FX compared Intelligence, UK companies wasted about £2.3 billion on non-EU international payments in 2014.

Foreign Exchange Made Digital

Fintech companies like TransferWise seem to be a better options for small businesses. “We built TransferWise to bring greater transparency to foreign exchange. This partnership is a great step towards solving that problem for SMEs,” Hinrikus says.

Critics say that the company is not profitable as they don’t charge high fees on their operations and spend much on marketing. But the company has won the support of Richard Branson and prestigious Silicon Valley venture capital firms including Andreessen Horowitz. TransferWise raised $58 million in a Series C financing round in January increasing the value of the company to about $1billion.

TransferWise hires about 400 employees from 25 different countries and run five offices globally. The funds will allow the company to expand to more countries and increase the currency routes it supports from 300 to around 600.