I have a son, Keenan, who is now living in Prague, and so when I saw a headline go by about TransferWise my interest was not academic. That title was Skyping Dough, by The Economist’s Schumpeter column.
The founder of the company, Taavet Hinrikus, was one of Skype’s first employees, and Transferwise leverages the peer-to-peer thinking that enabled Skype and other early communications tools. And with Transferwise he is seeking to democratize international money transfers.
The premise is to avoid actually transferring money internationally, to transfer money internationally without moving money. This means keeping the banks out of the equation and stepping into the world of ancient Islamic financial traditions, and the notion of hawala. [Note: this practice is not mentioned in the Schumpeter piece, and is not found anywhere on the Transferwise website.]
Hawala is an informal money transfer, based on a network of money brokers. Instead of actually transferring money physically — gold in treasure chests — or through the brokering of Western style banks — that charge large fees — hawala works by trusted exchanges between the hawaladars: the members of the network.
The figure shows how Hawala works: (1) A customer (A, left-hand side) approaches a hawala broker (X) in one city and gives a sum of money (red arrow) that is to be transferred to a recipient (B, right-hand side) in another, usually foreign, city. Along with the money, he usually specifies something like a password that will lead to the money being paid out (blue arrows). (2b) The hawala broker X calls another hawala broker M in the recipient’s city, and informs Mabout the agreed password, or gives other disposition instructions of the funds. Then, the intended recipient (B), who also has been informed by A about the password (2a), now approaches M and tells him the agreed password (3a). If the password is correct, then M releases the transferred sum to B (3b), usually minus a small commission. X now basically owes M the money that M had paid out to B; thus M has to trust X’s promise to settle the debt at a later date.
The usual mechanism for clearing the incurred debt is a later fund transfer in the opposite direction, such as B in the example above transferring funds to A, or other transactions in the reverse direction. The relationship and trust between the hawaladars, and relative frequent transfer of funds make the system safe and liquid.
Today, this system has been gradually displaced by Western style banking, except as a means for migrant workers to send remittances to their families at home.
In the case of Transferwise, there are no hawaldars. Instead, Transferwise manages accounts in the various countries it services today: sadly, not the Czech Republic, but just Britain, Switzerland, Poland, Sweden and Denmark. So if Linda, working in London, wants to send money to her Mom back in Stockholm, she logs into Transferwise, sends 100 pounds and her Mom can login and receive 1,010.91 Swedish kroner, which Transferwise estimates is a savings of 173.34 kroner over a traditional bank transfer.
I hope that Transferwise opens a US branch, so I can use these savings personally on fund transfers from European clients. And of course, a Czech office, so I can transfer money to Keenan without the onerous bank fees (although, Keenan has a few jobs lined up now in Prague, anyway).
I think this sort of innovation is fascinating. First, the return to an ancient, social approach, reproduced in the algorithms of an alternative to the conventional. And secondly, a means to sidestep the deeply entrenched, centrally controlled financial system, acting as a placeform (marketplace + platform) that brokers this simple exchange between individuals.
An aside: I recently watched a movie with Joseph Gordon-Levitt called Premium Rush, in which he plays a bicycle courier unwittingly trying to deliver a hawala password in New York City, and a pretty good adventure — and love story — ensues.