Currency-exchange is an enormous business with trillions of dollars crossing borders each year, and historically an extremely inefficient and opaque one. Those conditions have made the business ripe for disruption by technology. TransferWise, a currency-exchange unicorn that uses peer-to-peer technology to charge significantly less than the banks do to exchange funds from one currency to another, has built a fast-growing business doing just that in Europe. It's now also gained critical mass in the United States: In the eight months since it launched in the U.S. in February, TransferWise's cofounder Taavet Hinrikus told me, it's now completed more than $1 billion worth of transactions here.
I met recently with Hinrikus at the company’s New York office at WeWork during a whirlwind U.S. trip he was doing from his London base. He spoke excitedly about the prospects for growth in the United States, where he believes TransferWise can take market share from both the banks and from Western Union, that stalwart of money transfer. The cost savings for customers worldwide, Hinrikus notes, are enormous. "We're helping them save $1 million a day in bank fees," he says.
In the U.S., TransferWise generally charges 1% on transactions, somewhat higher than than its fees in the U.K., where costs are lower, but still a dramatic savings over the typical fees for currency exchange. More important, it saves customers on the hidden costs of currency transactions by using the mid-market rate – that is the mid-point between the buy and sell price – which generally isn't available to retail customers. Its U.S. business includes transfers between U.S. dollars and more than 30 currencies, including the pound, the euro, the Thai baht, the Brazilian real and the Indian rupee, on which it says its saved its customers more than $50 million in fees.
TransferWise isn't alone in trying to shift exchange away from the banks; others including Xoom (which PayPal agreed to acquire over the summer) and Remitly have also gotten into the digital currency-exchange business. But with a total of $91 million in funding from venture capital giant Andreessen Horowitz and others, TransferWise has been growing fast. As a private company, TransferWise doesn’t disclose a lot of numbers about it’s business. But it will say that it’s now doing more than $750 million a month in transaction volume – on top of the $4.5 billion it had done since inception as of January. By my calculations, that means TransferWise should, at the very least, top $10 billion in total transaction volume before yearend. With cross-border payments of $5 trillion to $10 trillion a year, "it's a pretty sizable market," Hinrikus says. "If we move 2% of that, it's a big business."
Hinrikus, 34, an Estonian who was one of Skype’s first employees, and his friend, Kristo Käärmann, 35, who then work at Deloitte Consulting, cofounded TransferWise in 2011. The idea came from Hinrikus’s frustration after he moved to the U.K. from Estonia, but stayed on Skype’s payroll there. He grew increasingly frustrated by the hefty fees of around 5% or so to convert his salary into pounds to pay his rent and other bills. Käärmann, also an Estonian living in London, faced the same problem in reverse: He was paid in pounds, and was equally annoyed by how expensive it was to send money home to pay a mortgage there.
The two came up with their own makeshift, peer-to-peer solution, bypassing the traditional banking system when converting funds from one currency to another. Soon, they had a little group of expat friends, trading currencies amongst themselves, based on the mid-market exchange rate. “We saved money, which was cool, but even more important, we were able to avoid our banks,” Hinrikus says.
Just as the emergence of new technology enabled Skype to eat away at phone companies’ dominance of global communication, so, too, was the banks’ grip on currency-transfer ready for disruption. In 2011, Hinrikus and Käärmann turned their little makeshift group into a company. "Banks will tell you that they'll give you the best rate. But you can have endless amounts of fun when you call them up and ask," Hinrikus says. "We are very committed to transparency."
Today, TransferWise is no longer completely peer-to-peer – currency flows are never so evenly matched – but rather a system for passing on lower rates than were historically available for small customers. Like most fintech entrepreneurs, Hinrikus argues that technology will disrupt the way traditional banking is done – and shrink banks’ hold on many of their core businesses. Says he: “Pretty soon we’ll see a large chunk of banking done by technology companies."
