A few weeks ago, the founders of London startup Transferwise found themselves on stage at the Sibos financial conference in Toronto, pitching their new business. The audience — 3,000 bankers and industry executives — listened in as the company explained its ambition.
Their plan, they said, was to upset the payments industry by making it radically more simple and less expensive to move money from one country to another.
It wasn’t a message the audience particularly wanted to hear — after all, many of them profit handsomely from wire transfers and exchange markets — but the company got a fair reception, according to co-founder Kristo Kaarmann. “There were a lot of smiles in the audience,” he says.
Chances are those smiles were covering up some uncomfortable feelings, however, since Transferwise is one of those startlingly simple ideas that has the potential to be incredibly disruptive.
Traditionally, people who want to send money to another country and in another currency (say from American dollars to Indian rupees) will go to a bank or an agency such as Western Union to organize the payment. They will pay money to the broker, who will then wire the money into the recipient’s bank account or destination for a price — usually at an exchange rate significantly worse than the underlying market figure, and often with fees or commission charged on top.
Transferwise makes things simpler by making the process much more transparent.
Instead of wiring the money into the recipient’s foreign account, it handles the back end by simply having accounts in the countries and currencies it needs to. That means when a customer wants to send some money, she pays it to Transferwise at one end, and the company can then pay it out to the recipient at the other end from a different account, directly in the target currency.
In order to minimize its own capital needs, the company tries to match payments on one side to payments going the other way. But if there are no matches it simply hands over money from its own coffers.
It is a simple idea that sidesteps the usual red tape and delays around international transfers — and allows the company to operate at lower costs, too. Those savings are passed on to the customer: There are no expensive wire fees and no cranked-up exchange rates. Instead users get charged a flat fee (£1, around $1.56) on small transactions or a small percent on larger sums.
It’s peer-to-peer payment — a sort of Skype for currencies.
The Skype analogy is no accident, either: The other co-founder, CTO Taavet Hinrikus, was an early employee at the telephony firm and has experienced the thrill of using the Internet to challenge a huge, expensive industry from the inside.
Since launching quietly over the summer as a self-funded startup, he says, the company has saved users £250,000 ($390,000) in bank charges and organically grown a core of regular, dedicated customers who are helping spread the word.
Just getting started
Today the service is small, not least because it only works between two currencies: sterling in the U.K. and Euros. The team plans to roll out soon into new areas – first low-hanging fruit like the Swiss franc and the Polish zloty but then hopefully into other, more lucrative markets with very large expat communities. It is eyeing the Australian dollar, the South African rand and ultimately the U.S. dollar and Indian rupee.
That expansion will require a lot of regulatory work, since the company must comply with financial rules and laws to prevent its being used for money laundering (this is one significant benefit of starting in Europe, where a single regulatory burden covers 500 million people, 27 countries and 14 currencies).
But it will also have to work hard to outflank the banks, which are unlikely to be happy to lose any custom, and gain user trust — something that the team knows is going to be tough.
Kaarman says this is an area where Transferwise is moving carefully, because “the day you lose your first customer’s money, you are in trouble for a long, long time.” He’s right. A false step could easily kill off a startup.
So what comes next?
More currencies, more users, more awareness are all important — and to get there, funding could be high on the agenda.
So far the company has been self-funded, and it only has a skeleton staff. Scaling up will require more investment. If nothing else, it needs significant capital in each country it enters in order to guarantee prompt payment. However, given how straightforward and useful the service is, I don’t think it will be too long before there is some significant investment coming in.
Photograph used under Creative Commons license courtesy of Seedcamp