The Skype of Muti-Currency Payments: TransferWise

According to World Bank, an estimated $515 billion will be transferred by the US immigrants to their respective countries by 2015. Remittances market is huge and growing exponentially. Entrepreneurs have taken note of this market opportunity in this segment and are establishing startups.

One such startup which was recently awarded as the Best Middleweight Startup by Europas-European Tech Startup awards is TransferWise. TransferWise was founded in London in March 2010 by TaavetHinrikus and KristoKaarmann. It was backed by investors like Peter Thiel of Valar Ventures (founder of Paypal and Facebook’s first investor), IA Ventures (an early stage VC investing in companies creating competitive advantage using data), Index Ventures (Technology VC firm), XavierNiel of KIMA ventures and Seedcamp with collective investment amounting to $6 Mn as of May, 2013.

This one of a kind business model of TransferWise offers a disruptive solution to individuals sending money from one country to the other (involving different currencies). A normal transfer of £1,000 into Euros using Western Union can cost over £100 once you add in exchange rates and other fees, whereas through a bank wire transfer cost £50. TransferWise offers the same transfer at an attractive rate of £4.50, a direct savings of atleast over £45.

The remittance service offered by TransferWise is aimed at expats, retirees, overseas workers and small and micro enterprises. These categories of users collectively transfer a significant amount of money every year. According to TransferWise, expatriate retirees alone transact £400 million annually.

Born out of frustration of its two founders while transacting in multiple currencies, this online service is an inclusion to the payments industry that transforms the remittance process radically to a simple and cheaper affair. Through TransferWise a user gets away with most of the charges like hidden fees, skewed currency exchange rates offered by banks, broker fess etc.

TransferWise works on a 4 step procedure of Create Payment - Confirm Payment - Upload Money - Payment Delivered on a web portal. It’s a peer to peer payment service – just like Skype – says one of its founders. With its tight integration with all payment systems, it has removed all the middlemen men from the transaction process. TransferWise uses the same mid-market exchange rates that traditional banks get on the interbank market. However, the banks play around with that exchange rate and then factor in their own fees into the process. In contrast to this, TransferWise takes a fee of £1 on transfers up to £300. In 1 year since its inception, $13 Mn in funds have been transferred.

Below is a video which shows how TransferWise works:

Source: transferwise

LTP View: TransferWise has been successful in creating an appeal to its target customers. The total fund transfer of $13 Mn in 1 year highlights this fact. Remittance market is growing and companies competing against Western Union are on the rise. Building customer relationships in the remittance area could be a challenge that these startups may face. There are other companies hyperREMIT and Regalii out there who offer low cost international money transfer. Customer retention can be a big problem in the remittance market as the customers will switch vendors based on the low cost option and security of transferring funds. It will be interesting to see if companies like TransferWise grow in size and if they would still stick with low cost transfer option or increase their transfer fees. If the latter does happen, there will be low cost alternatives in the market which may affect the long term revenues of TransferWise.