How does TransferWise charge such low fees?

LIMITLESS GROWTH

The London start-up Transferwise is growing rapidly with its cheap and uncomplicated transfers abroad and now has more than four million users. But the market is fiercely competitive.

In the north of London's city center, in the middle of the hip, bohemian Shoreditch district with its chic clubs, designer shops and bars, there is a seven-story building called the “Tea Building”. From here, the start-up Transferwise is revolutionizing money transfer - worldwide. Founded in 2010 by the two Estonians Taavet Hinrikus and Kristo Käärmann, Transferwise offers its customers inexpensive international money transfers. Four million customers send money in 49 currencies on over 1,300 transfer routes (e.g. from Austria to the USA and vice versa). The focus is on peer-to-peer transfers, i.e. direct money transfers between private individuals.

Low fees as a plus

When it was founded in 2010, the concept was still completely revolutionary, because traditional banks and specialized providers charged high, often hidden fees for decades as soon as customers made cross-border transfers. Today, when more and more financial services are digital, it is also getting tighter for Transferwise, because digital banks like Revolut are competing with fintech in the market. So: How does Transferwise actually stand out from the competition?

According to Taavet Hinrikus, there are two main things: continued low fees and high efficiency. "If you want to send 1,000 pounds from London to Vienna, you open the Transferwise app, press 'Send' - and 15 seconds later the money is in Vienna," explains Taavet Hinrikus when we meet him for an interview at the company headquarters.

"The banks really do a bad job"

The start-up flair can still be felt here. So it is fitting that company boss Hinrikus wears a T-shirt with the company logo. “One day we hope to be able to send money in less than a second,” says Hinrikus. “That's why Transferwise works. It's easy to use, saves users money and works at lightning speed. ”Hinrikus is not afraid of the large banks already mentioned. "The banks are really doing a bad job," said the Transferwise co-founder. The big vision: to reduce the costs for your own service as much as possible. To transfer money, it goes to Hinrikus, in the future it will cost as much as sending an e-mail. Currently, 0.3 to 1.5 percent of the transfer amount is charged as a fee on the main routes (depending on the currency route and payment method, note). This puts the company in the lowest fee segment compared to traditional banks and, according to its own statements, is eight times cheaper than banks that charge fees of up to five percent. The cheap service is also made possible by the official exchange rate that Transferwise uses. Banks, on the other hand, usually use their own exchange rates, which are more profitable for them. In addition, fintechs such as Transferwise have lower costs, for example by eliminating the expensive branch network of major banks.

Three cost factors in transactions

Nevertheless, it will not be easy to offer money transfers completely free of charge in the future. Because Transferwise is still dependent on the fees, which are divided into three cost factors: First, there are direct costs for the transaction. Here, Transferwise has the advantage of economies of scale: namely that an increasing number of users lowers the transaction costs (since fixed costs can be divided over several transactions). On top of that there are costs for the service and administration - and thirdly, the income from the fees is also used to be reinvested in order to improve the service.

Partnerships with banks

As the first non-bank, Transferwise is also part of the Faster Payments Scheme Limited (FPSL) and has access to the SEPA Instant Payments system. This is of course also associated with costs. Nevertheless, the Faster Payments Scheme has the advantage that no bank is interposed, which enables more cost control. There are of course cooperations with banks.

For example, the mobile bank N26 has already integrated the Transferwise offer. The second largest bank in France, BPCE, and the British banking start-up Monzo are also among the partners. And: "We are open to partnerships with traditional and new banks," says Hinrikus. But the market is hotly contested. One of the biggest competitors is the London-based start-up Revolut around founder Nikolay Storonsky. Because Revolut introduced transfers to 130 countries in 2018 - free of charge.

Rivalry with Revolut

When asked about this, Hinrikus says: “Before we introduced our card (as part of the“ Borderless Account ”, note), we saw Revolut in no way as a competitor. Of course, some users can choose between our card and Revolut's. ”And:“ But by and large we build two different things to solve people's problems. We concentrate on international money transactions, and Revolut is building - this is how it seems to me - a classic bank, ”said Hinrikus. The co-founder also doubts that the international transfers are actually free of charge, as Revolut claims. Because if you take a closer look at them, the individual money transfer itself might be free of charge. “But if you have to pay around ten pounds a month and the contract can't be canceled before a year is up, a transaction can cost 100 pounds. That's not my definition of 'free of charge', ”says Hinrikus.

Hinrikus (formerly CEO, now Chairman) started in 2010 together with his colleague and current CEO Kristo Käärmann. It was a learning-by-doing mentality that they both displayed. After the simplest prototype had been built and investor funds had been secured, the service was launched in 2011.

Increasing sales

In addition to cheap peer-to-peer transfers within seconds, Transferwise also offers a multi-currency account with a debit card (borderless account) in five different countries (or the euro countries). Frequent travelers can receive transfers from all over the world and withdraw money free of charge in these countries too. Transferwise also offers services for corporate customers who act as a service interface for other providers.

Transferwise transfers more than € 3.4 billion per month; a total of US $ 397 million in investor money has been raised so far. Transferwise's annual revenue grew 75 percent to £ 117 million (€ 132 million) in the past fiscal year, and net income after tax was Pfung 6.2 million (US $ 8.03 million). In addition, customers would have saved a total of more than € 1 billion a year compared to a bank through transfers via Transferwise.

Well-known investors

Investors included the co-founders of PayPal Peter Thiel and Max Levchin and the founder of the Virgin empire Richard Branson. But not only the supporters, but also the biographies of Hinrikus and Käärmann are impressive: Until 2008, Hinrikus was Director of Strategy at Skype and one of the first employees at the communications giant. Käärmann, on the other hand, worked for the Deloitte consultancy. The idea of ​​Transferwise came to both of them through their own everyday experiences. Both were paid in euros but needed British pounds to pay their bills in London.

When it was founded, however, no one could have known what would happen politically in Great Britain. Still, the Transferwise founders aren't too worried. "Brexit will have little impact on our business," says Hinrikus. "We are a global company, Great Britain is just one of many markets."

view in the future

In any case, the USA will soon have replaced Great Britain as the largest market, explains Hinrikus. In some ways, however, Brexit will play a role. Transferwise is opening a new European headquarters in Brussels: “With the new Belgian license, for which we have applied, we are compensating for the loss of the“ passporting rights ”of our British license in order to ensure smooth service for our customers in Europe in the future “, Says Hinrikus.

And what does Transferwise have in store for the coming years? "Our main goal is to continue growing as quickly as possible - and our number of employees will also grow, certainly by a few hundred," says Hinrikus. To date, Transferwise has a total of 1,400 employees. The banks would still fail in many places. “The question is, however, how quickly we can increase our transaction volume,” says Hinrikus, “currently it is three billion British pounds per month. How long will it take to reach ten billion a month? ”Hinrikus believes they could achieve this goal by 2020. And: "This year we will outperform Western Union in terms of transaction volume," he says. In any case, Hinrikus is not thinking of taking a break - and is already saying goodbye to the next meeting in the London “Tea Building”.

Text: Niklas Hintermayer, Manuela Tomic
Photos: Jason Alden

This article was published in our January 2019 edition “Growth-Innovation-Research”.

Niklas Hintermayer,
editor