(First of a two-part interview with Kristo Käärmann, co-founder and CEO of TransferWise)
According to World Bank estimates, an estimated 270 million migrants around the world will send a combined US$689 billion back home this year. This represents a massive capital flow and market demand, and it has given rise to a boom of financial technology startups offering services to help people make cross-border money transfers with greater ease.
One of them is Transferwise, a UK-based company founded eight years ago that facilitates international bank transfers, primarily for individuals and small businesses. It has been offering a simpler and cheaper alternative to banks for international money transfers.
Reaching 5 million customers and processing 4 billion pounds (US$4.87 billion) of money transfers each month around the globe, the fast-growing startup closed a US$292 million secondary funding round in May, which doubled its valuation to US$3.5 billion. It has expanded its operations into over 70 countries, with its Asia-Pacific hub in Singapore. Last year, Transferwise launched its service in Hong Kong.
In an exclusive interview with EJ Insight, Kristo Käärmann, co-founder and chief executive of TransferWise, talked about how the company can win against established majors in the global money transfer landscape.
Here are excerpts from that interview:
Q: What is Transferwise’s role in the cross-border payment process? What makes Transferwise compelling to merchants and individuals in cross-border payments?
A: I started TransferWise with my co-founder Taavet Hinrikus in 2011 when we realized how much it cost to transfer money between the UK and Estonia. Taavet was based in London but paid in euros; I worked in London but paid a mortgage in Estonia in euros. We each needed what the other had so we figured out a fair way to exchange money with each other using the mid-market rate (the real exchange rate you see on Google) without the mark-up rate and fees charged by the bank. We saved thousands of pounds and realized there were millions of people across the world who could do the same.
Today, we move 4 billion pounds (US$4.87 billion) every month on behalf of our 5 million customers, saving them about 1 billion pounds a year compared to sending money through the banks.
TransferWise has a mission of making international money transfers instant, convenient, transparent and eventually free. Our transfers are now up to eight times cheaper than the banks, and we will continue to reduce prices as quickly as we can. More than 20 percent of our transfers arrive in the recipient’s bank account within 20 seconds. More than 80 percent arrive by the next day.
If you can send an international email for free, and you can make an international call over the internet for free, there’s no reason why you shouldn’t be able to move your money to another country for free. That’s what TransferWise hopes to be able to offer eventually. We have made a lot of progress, and we move closer to our target every year.
Q: How does Transferwise work in the back end to provide fast, low-cost money transfer service?
A: TransferWise works by cutting out the middlemen of international remittances. Who are these middlemen? When you send money globally using a bank, your money goes through the correspondent banking system – sometimes also colloquially referred to as the SWIFT system (after the name of the messaging system used in correspondent banking). Your money moves through several banks – local, regional and international ones – before arriving at your recipient’s bank. Each bank that handles the money is a middleman who collects some fees and causes some delays to the transfer. This is why banks charge 5 percent on your transfer and often take three to five working days, if not more, to deliver your money.
TransferWise bypasses the correspondent banking system using a network of local bank accounts covering the 71 countries we serve. We have been building this network for the past eight years. When you send money from Hong Kong to your friend in the UK, once the TransferWise Hong Kong account receives your money, we pay out using the TransferWise UK account to your friend. Often, the money never has to cross borders. Our transfers are hence faster and cheaper. In fact, our mission is to make them instant and eventually free – in the same way that making an international call over the internet is already free, and sending an email halfway around the world is already free.
Technology helps this process in a few ways. First, customers never have to leave their living rooms to visit a physical branch because our engineers have built the most convenient app and website that is intuitive to use. Not needing physical branches means cost savings that are passed back to customers. Second, technology helps us predict using algorithms which part of the world we will need to top up funds for, so that we can continue to facilitate transfers 24 hours a day, seven days a week. Third, technology helps us automate tasks that may be handled manually in a bank, keeping our operations efficient.
Q: How does Transferwise make money? What is the major source of income for Transferwise?
A: We collect a small fee for each cross-border transfer we handle. Globally, the average fee is 0.67 percent for each transaction, compared to 5 percent or more that banks often charge. We can make money despite the small fee because we’ve found a way to do things much more efficiently compared to the banks.
Q: Is Transferwise making a profit? What is the profit model of Transferwise?
A: TransferWise has made a profit for two consecutive financial years now. Being profitable means we have found a business model that works and is sustainable. It also means customers can trust us more as they know the service is self-sustaining and not dependent, for example, on whether investors are willing to continue to stomach losses.
Q: How does Transferwise compete with rivals like Alipay, WeChat Pay, and emerging fintech startups to power cross-border payments?
A: Cross-border transfer volume by consumers and small businesses amount to trillions of dollars a year. The bulk of that volume is still going through banks. Our main competitors are therefore the banks, especially since many of them are still hiding their fees in the exchange rate mark-up, a practice we strongly oppose. Since this is a multitrillion-dollar problem, there is definitely space for many companies to tackle the problem at the same time, from different angles. We welcome that. What’s most important to us is that consumers benefit in the form of cheaper and faster transfers.
Q: Last year, Transferwise launched its service in Hong Kong. What is the license Transferwise obtained for operating in Hong Kong?
A: TransferWise operates our remittance product in Hong Kong. We are licensed as a Money Service Operator and we are regulated by the Hong Kong Customs and Excise Department.
We are currently applying for a Stored Value Facility license from the Hong Kong Monetary Authority. This will enable us to offer our multi-currency account product – known as the TransferWise Account – to Hong Kong customers, allowing them to hold and convert money in over 40 currencies.
Q: Is there any plan for the company to apply for a license to operate in the mainland China market? Why? How would Transferwise expand into the mainland China market?
A: We see a large demand for our product in China. Using TransferWise, customers can now do transfers into mainland China, but not from mainland China. We have been actively engaging the regulator in mainland China to find the best way to begin providing a service from China. Cheaper and faster transfers will benefit Chinese consumers and help Chinese businesses become more competitive in international trade.
Q: Amidst the anti-globalization forces and the “Tech Cold War”, do you think the room for the development of foreign tech firms in China is shrinking? Is that a concern for Transferwise’s expansion in the mainland market?
A: At the World Economic Forum in Dalian, China, on July 2019, Premier Li Keqiang said the Chinese government is “firmly committed to all-round opening-up and building an open economy of a higher standard”. He also specifically pointed to an acceleration in the opening up of the financial sector. These and other remarks by the Chinese government have given tech firms reason to be optimistic that we have a role to play in China and that we are welcome there.
(Second part: Transferwise’s growth strategy, view on Libra)
– Contact us at [email protected]