TransferWise

TransferWise is a peer-to-peer money transfer service launched in January 2011 by Kristo Käärmann and Taavet Hinrikus. Based in the United Kingdom, the service allows users to transfer money between countries and make foreign payments using the mid-market or interbank exchange rate.

In its first year, transactions through TransferWise amounted to 10 million EUR,^[1] and the service has expanded from allowing conversions between euros and British pounds sterling to also include US dollar, Polish zloty, Swiss franc, Hungarian forint, Georgian lari, and the respective crowns of Norway, Sweden and Denmark.^[2]

History

The creation of TransferWise was inspired by the personal experiences of Taavet Hinrikus, Skype's first employee, and financial consultant Kristo Käärmann. As Estonians working between their native country and the UK, they felt the "pain of international money transfer"^[3] due to bank charges on the amounts they needed to convert from euros to pounds and vice versa. In the words of Hinrikus, "I was losing five per cent of the money each time I moved it. At the same time my co-founder Kristo Käärmann (also from Estonia) was starting to get paid in the UK and was losing a lot of money transferring cash back home to pay for a mortgage there."^[4]

It inspired them to make a private arrangement, with Hinrikus – who was paid in euros – putting this currency directly into Käärmann's Estonian account so he could pay his mortgage without having to convert pounds to euros, while Käärmann returned the favour by putting pounds into Hinrkus' UK account.^[5] This inspired them to develop a crowdsourced currency exchange service to offer a cheaper alternative to established institutions.^[6]

The company debuted in Jan 2011 as CommonFX, supposed to represent 'common people' and 'foreign exchange.'^[7] The founders considered it to be well understood by their users, although the opposite was the case:

"But once we got to the group of people, who were female, blonde and good looking enough to have 5000 male friends on their facebook profile, then we only saw the depth of cosmos in their eyes when they heard the name CommonFX. They were not quite sure whether we have an electro band or design kitchen appliances." ^[8]

'Transferwise' was then chosen to imply the 'wisdom' of using it. In Feb 2012, their approval with the UK financial regulator was finalised.^[9] In April 2013, they stopped letting users purchase Bitcoins, blaming pressure from other market players.^[10]

How it works

Transferring cash comprises choosing the origin and destination currencies and bank accounts; and how much is to be transferred. The sender's name (or several in case of a joint account), address and birth date may also be requested for anti money laundering compliance. As these details are submitted, the money sent, money received, exchange rate, Transferwise's fee and the time payment is scheduled to arrive are displayed. Then the user pays, either by debit card or bank transfer. In common with most financial-only companies, credit cards are not accepted due to their high fees.

Transfers take anything up to four working days, or one working day for the premium 'priority payment.'^[11]

The company's charges are €1 or 0.5% (whichever is larger) or equivalent.^[12] Equivalent charges mean UK£1, 5 PLN, 2 CHF, 10NOK, 10 SEK or 10DKK. The fees charged by conventional market players including banks may vary from 10 EUR to 30 EUR or more, or include minimum transfer sums such as 100 EUR to 500 EUR. This makes Transferwise practicable for smaller sums. Their fees are low as Transferwise swaps the transfer with an equivalent transfer going the opposite direction, a different practice to that of a bank. TransferWise makes no charge for paying university tuition fees.

Like all transfer services the sender needs to know the destination International Bank Account Number (IBAN), and possibly the SWIFT/BIC code (which identifies the bank). The company recommends checking them with ibancalculator.com, as users are less familiar with them than the bank numbers for their own country.

TransferWise offers a lower cost alternative to move money internationally by charging a low exchange fee in comparison to the fee charged by the regular banks. The company is backed by investors like Index Ventures, Kima Ventures, IA Ventures and Seedcamp. In May, 2013 the company picked up $6 Million in funding as part of its Series A funding.

Example

Alan lives in the UK where he uses the pound, and his bank is Barclays. He wants to donate £20 to the International Committee of the Red Cross (ICRC). The ICRC is a sovereign charity headquartered in Switzerland where the currency is the Swiss franc (CHF). They bank with UBS. Barclays would charge Alan £25, making a total of £45.^[13] Less than half would get to the ICRC.

If he uses Transferwise instead, the ICRC will get £19.00, because Transferwise charge £1. In Sept 2013, the exchange rate was CHF1.46650 to the UK pound. That means the ICRC receives CHF27.86 or £19.00. He enters the ICRC's publicly available bank details; IBAN CH63 0024 0240 C012 9986 0 and SWIFT/BIC code UBSWCH ZH12A, published on the ICRC website.^[14]

In fact, Alan's money goes to someone else in the UK who is being paid by another Transferwise customer in a foreign country. Likewise, the ICRC is paid using money someone in Switzerland is attempting to send outside Switzerland. The next day, Transferwise action the transfer.

Currency fluctuation safeguards

It is not an instant payment system. Between the time the user makes the payment and it is carried out the next day, the Forex can move meaning the user has sent more or less than they intended. In the above example there are no issues because it is only a charitable donation. Alan simply sent an amount of his own currency without regard to how much was actually received.

Transferwise defaults to this scenario, but the user can stipulate how much is actually received. It is useful for university fees, for example, on which Transferwise waives its fees.

If the sender's currency goes up, then the transfer is still made. The money which has been overpaid is either refunded to the sender's bank account. If the sender's currency decreases, the receiver would be underpaid. For this reason Transferwise adds small deposit of 3%. If unused, it is also refunded.

Investors

TransferWise has received seed funding amounting to $1.3 million from a consortium including leading venture firms IA Ventures and Index Ventures, as well as individual investors such as PayPal co-founder Max Levchin, former Betfair CEO David Yu, and Wonga.com co-founder Errol Damelin.^[15] TransferWise also received investment after being named one of Seedcamp 2011's winners.^[16] In May 2013 it was announced that TransferWise had secured a $6 million investment round led by Peter Thiel's Valar Ventures.^[17]

Media attention

Named as one of "East London's 20 hottest tech startups" by The Guardian,^[18] TransferWise has also been picked as a Wired UK Start Up of the Week^[19] as well as being listed as number 12 in Startups.co.uk's list of the top 100 UK start-ups of 2012.^[20] TransferWise was also named by TechCrunch as one of five "start-ups to watch" at Seedcamp's 2012 US Demo Day.^[21]

References