Nowadays, 85% of international transactions are being implemented by banks, due to the fact that people rely on their trust as well as lack of knowledge about the possible alternatives (Lemon, 2014). Though banks provide higher security services and facilitate payments in any required currency, it has the main shortcoming that high amount of fees is incurred on each transaction without the availability of clear and precise information prior to agreement. In the UK, standard payment for each transaction can reach to £20-25 per and 5-7% margin is gained from loaded exchange rates to those banks who claimed they offer “commission-free” transaction option. In total, the hidden fees incurred in the international money transfer can range from 4% to 15% (Lemon, 2014).
TransferWise is a peer to peer (P2P) money exchange network that allows customers to make money transfer between different currencies, saving a lot of money comparing to the traditional bank transfer. The company was founded in 2011 by Taavet Hinrikus, Skype’s first employee and Kristo Käärmann, a financial consultant. Wired named TransferWise as one of London’s top 10 startups in 2014 since it is indeed the leading fintech company which disrupting money transfer market. Until the end of 2015, over $8 billion have been transferred through TransferWise platform with charging only 10% of the cost of the traditional banks, which saving customers more than $350 million in fees (Xavi, 2015).
Banks set their own exchange to make money off customers. Based on the principle people deserve transparency, fairness and better value when comes to their money, TransferWise offers customers a real exchange rate which is also known as the mid-market rate. Mid-market rate is available on independent sources such s google, XE or Yahoo Finance which makes transactions more transparency without any hidden costs. The cost charged by TransferWise is only 0.5% in total per transaction. Figure 1 illustrates the different amount of charges between TransferWise and banks.
Figure 1 Cost Comparison between TransferWise and Average Bank
P2P currency exchange model – How does it work
Many people are wondering how is it possible to charge only 0.5% of the transaction fee? But it actually can happen, here is how it works:
TransferWise is a double sided model. The company opens bank accounts in every country they operate in and match customers who are willing to exchange the same currency but in opposite direction. For instance, a person in the US (Dollars Holder) wants to transfer money to a British account, the dollar holder transfers the money from his own bank account to TransferWise American bank account. In the meantime, TransferWise will transfer money in the British bank account (in pounds) to the recipient’s British bank account. So the fact is that Dollars Holder’s money never leaves the country but it’s rerouted to other customers who is being sent a similar amount by others in abroad.
Figure 2 TransferWise business model
TransferWise – The money transfer revolution
In January 2015, TransferWise secured $58 million in an additional funding round which is the further support came from previous TransferWise backers such as Sir Richard Branson (Dawson,2015). This has made the company become one of the startup that receive significant amount of funding from Silicon Valley. In 2015, the amount of money transfers in the US market through TransferWise platform is more than $1 billion. In the future, TransferWise intend to not only focus on money transfer market but also revolutionize the entire banking industry.
Dawson, F. (2015, 1 31). Transferwise Secures $58m From Andreessen Horowitz And Others. Retrieved from Forbes: http://www.forbes.com/sites/freddiedawson/2015/01/31/transferwise-secures-58m-from-andreessen-horowitz-and-others/#472648f75c2e
Lemon, S. (2014, 8 19). Revealing Hidden International Payment Costs. Retrieved from Currency Cloud: https://www.currencycloud.com/news/blog/revealing-hidden-international-payment-costs/
Xavi. (2015, 12 8). Transferwise – The money transfer revolution. Retrieved from Harvard Business School: https://rctom.hbs.org/submission/transferwise-the-money-transfer-revolution/