London-based Transferwise is potentially one of the most disruptive financial tech startups out there – the company offers cross-border money transfers with extremely low charges by exploiting a P2P-esque network of local payments – but its mechanism has always been a bit clunky to use. That’s changing, though, as the company just enabled debit card payments.
That may sound like a small change, but it’s pretty fundamental to Transferwise’s future. Here’s why.
The previous system involved three steps (or, from the customer’s perspective, two). An example: a British customer would go to Transferwise’s website and say that he wanted to send £100 ($151), for example, from the UK to Germany. He would then need to visit his own UK bank’s online banking facility to transfer the £100 to Transferwise’s UK account. The startup would then take the euro equivalent out of its German funds – stocked up by users in that country – and make a local payment in Germany to the intended recipient.
The introduction of debit card payments removes that second step, meaning the customer can now do everything needed in one go on Transferwise’s website. This removes a major source of friction, and I would be surprised if it didn’t accelerate the company’s growth quite quickly (Transferwise did £10 million in currency traffic in its first year, up until the end of February 2012, and by the end of 2012 it had done £50 million).
“We made it simpler and faster for our customers,” CEO Taavet Hinrikus, who was once Skype’s first employee, told me.
According to Hinrikus, Transferwise’s customer base largely consists of individuals and small businesses, and the average transfer amount is around £1,300. The company offers savings of up to 85 percent on standard international transfer rates, levying a £1 charge on transfers up to £200 and typically just 0.5 percent on larger transfers. Exchange rates are taken straight from the interbank market without any fiddling of the going rate (as happens with some banks and wire transfer companies).
There are limits to what Transferwise can do, though, and regulation is unsurprisingly (and understandably) the limiting factor. Within Europe, if you’re a financial services company and you’re given the all-clear by one national financial regulator (the UK’s Financial Services Authority or FSA, in Transferwise’s case) then you’re fine to operate anywhere on the continent. However, the company does not have regulatory clearance in other parts of the world, such as the U.S.
For that reason, although Transferwise can handle transfers from Europe to the U.S., paying out in U.S. dollars, it can’t handle the reverse transaction. The same will apply to Canadian dollars, which the platform will start supporting in a week or so. You may be wondering how that works if Transferwise can’t actually have customers in the U.S. or Canada — according to Hinrikus, the company uses “large corporate peers” on that side of the Atlantic, including large companies sending money to Europe, other trading platforms and “financial markets”.