Fintech — how TransferWise Disrupts International Payments

TransferWise has openly challenged banks on international transfers and currency exchange. And with expletives in advertizing, and underwear-clad flash mobs partying outside London’s Royal Exchange, the unicorn is styled as the most disruptive of FinTech startups.

On the surface, it seeks to replace opaque banking processes with transparent, peer-to-peer power. Underneath, TransferWise’s P2P works anonymously and asynchronously, through not only algorithmic pairing and automation, but also more traditional liquidity management.

It competes with money transfer services, cryptocurrencies, and alternative payment rails seeking new global routes for money transfers. And while it denounces banks, TransferWise also works with banks.

Let’s take a deeper look at TransferWise.

TRANSFERWISE — THE DISRUPTIVE PITCH POINTS

TransferWise’s major pitch points are cost and transparency.

First, it promises to save customers “up to 90%” of standard bank fees for international transfers. Second, it offers “the real exchange rate” — the mid-market, interbank, or spot rate. This, it says, cuts out the “hidden” charges that banks typically include in their exchange rates.

Third, TransferWise pitches transparency. It’s app shows the exact transfer cost, and estimates how much will be deducted from the sender and paid to the receiver. Bank customers have typically been left to guess these amounts themselves.

Speed is, however, not a key pitch point. TransferWise aims to have 85% of UK-source transfers arrive within 24 hours — but also notes that transfers may take a few days.

THE SIMPLE P2P PICTURE

Most simply put, TransferWise pairs two transfers going in opposite foreign directions. It then reroutes the two within their respective countries.

In this sense, TransferWise enables international transfers — by eliminating the international. For example — Frank in France wants to send money — €100 in British pounds — to Brian in Britain. He puts the transfer through using TransferWise, paying the €100 and fees, into its French account. But TransferWise doesn’t transfer that exact money to Brian. Instead, its algorithm spots that Betty in Britain wants to send that same amount of money to Fleur in France. And rather than move both moneys across borders, it seamlessly pays them out locally — Brian gets the money paid by Betty, from TransferWise’s British account, while Fleur gets the money paid by Frank, from TransferWise’s French account.

HOW TRANSFERWISE DOMESTICATES TRANSFERS

Such money movements — domestic mutual compensation for international payments — are not entirely different to how banks and FX brokerages work. And TransferWise, from this perspective, could itself be seen as a micro-moment bank or brokerage.

Rather than connecting specific people, it processes, calculates and estimates the mass of transfer amounts requested in each direction — from/to Britain, in GBP, for example. It then works to match these currency flows.

If there are deficits, or imbalances in inward and outward flows — say, GBP transfer volumes spike, relative to other currencies and directions — TransferWise dips into institutional interbank markets to buy currency and maintain liquidity.

This has been necessary when liquidity gaps have emerged during expansion — for example, when TransferWise added U.S. dollars, Polish zloty and Swiss franc.

A BREAKDOWN OF WHAT TRANSFERWISE COSTS

Along with the zeitgeist of being an alternative to dusty and distrusted bank giants, lower cost is TransferWise’s main selling point. Let’s break it down, step by step.

First, TransferWise charges a percentage of the transferred amount — between 0.5 and 2.5%, depending on currency type and transfer origin.

There’s also a minimum fee for each transfer — for example, £1, €2, and $3. An upper threshold caps the overall percentage when the transfers are larger.

Finally, TransferWise adds the cost of any interchange fees levied by the credit card networks when customers pay their transfer with Visa or Mastercard. These fees range from 0.3% to 2%.

Bank transfers and debit card payments carry no fees on the TransferWise side.

And since bank transfers are typically made towards TransferWise’s account in the sender’s home country, they should mostly also be free, on the bank side.

WHERE DOES TRANSFERWISE BYPASS COST?

TransferWise largely bypasses the transfer side of the banking system. The two only connect when the sender wires funds to TransferWise’s bank accounts — in each country of operation — and when TransferWise pays the receiver into his/her account.

For the customers, this eliminates standalone transfer charges, and any charges built into the banks’ FX rates. On TransferWise’s side, keeping its payments gateway largely outside the established FX and transfer network cuts out correspondent bank charges.

Meanwhile, back-end automation and staying virtual also helps keep cost low.

THE BOON AND DIFFICULTY OF REMITTANCES

TransferWise has some 450 “payment corridors” — with transfers from the UK to Spain, Germany, and India being the most busy.

Its biggest potential market is likely remittances — where the lower cost that TransferWise offers can make a significant difference, and thus be a key selling point, for workers sending salaries home across borders.

The main hurdle is likely securing a reasonable balance of flows between currencies to keep its cost down. This is particularly tricky with remittances, which typically flow heavily in one direction.

For example, the U.S. is a key remittance market, where TransferWise has been growing fast since launching in January 2015 — but it has not yet brought aboard the main receiver currency, the Mexican peso. And while TransferWise’s model will benefit from growing global Internet connectivity, it remains troublesome for those without a bank account or credit/debit card, or who need to deal in cash or cheques.

HOW TRANSFERWISE DIFFERS FROM WESTERN UNION, XOOM

TransferWise most vocally challenges the banking sector — but it’s competition is also international money transfer services such as Western Union, Paypal’s Xoom, and blockchain-deploying payment startups.

What are some key differences between TransferWise, Western Union, and Xoom?

First, TransferWise remains online-to-online only. Western Union is still heavily shop-based, while Xoom has integrated Cash Pickup networks in Mexico and Colombia.

Second, while both Western Union and Xoom can deliver money to bank accounts, these services are sometimes dependent on their relationships with specific banks. TransferWise is rather more bank “agnostic.”

Third, TransferWise is looking to build its system on user’s money entirely — while Western Union and Xoom rely on their own capital to achieve transfers.

Finally, all three — and their competitors — differ on FX rates and fees.

TRANSFERWISE AGAINST BANKS… WORKS WITH BANKS?

TransferWise might become Fintech’s most brazen example of “disrupt them and they will come.”

In December 2015, it struck a partnership with Estonian retail bank LHV, and is talking to other banks — reportedly about integrating TransferWise’s system into banks’ smartphone apps.

What does each side stand to gain?

Transferwise might like a direct link to bank customers’ accounts — since when customers use credit or debit cards, it incurs processing fees. A risk-cost calculation likely also factors — with direct transfers and integration, banks bear more responsibility regarding fraud, KYC and regulation. The banks will want to negotiate a deal for assuming this risk — and the associated cost. The exact model remains to be seen. Transferwise already uses “licensed banking partners” in the U.S. to comply with regulation there.

THE FUTURE OF TRANSFERWISE, THE PUZZLE OF SCALE

Scale is an inevitable step for any startup — but it can also be a double-edged sword, bringing challenge alongside opportunity. TransferWise’s growth depends on getting as many customers as possible — and both finding and onboarding the money flows that will establish the closest possible parity between currencies. Imbalances will perhaps be its main challenge — both in currency flows, and relatedly, between market growth and the cost of maintaining liquidity.

So far, TransferWise is loss-making — £11.4m in the year to March 31, 2015 against revenues of £9.7m, up fivefold — with expansion and advertizing the main expense posts.

Check out more content on SmartUp!

An app for startups, entrepreneurs and innovators everywhere to learn, get inspired and connect. You can also see what we’re up to on Twitter, Facebook & Instagram!