“Money transfer is actually incredibly boring. Nobody cares about money transfer,” says Taavet Hinrikus, the co-founder of TransferWise, a—you guessed it—money-transfer company.
That is true, however, only when it is easy. And that’s almost never the case.
As anyone who has done it knows all too well, getting money across borders involves one of two things: onerous fees and a lot of time (assuming your bank obliges by actually telling you the various codes you need). There are specialized money-transfer services such as Western Union but they are not cheap. At those times money transfer isn’t boring, it is excruciating.
Hinrikus knew this pain well, when he moved from Estonia to London in 2007. At the time he worked for Skype (he was its first employee) and received his salary in an Estonian bank account. Each month he transferred it to a British account, losing time and money in the process. Meanwhile, Kristo Käärmann, an Estonian working for Deloitte in London and receiving a salary in British pounds, had to transfer money back to Estonia to service his mortgage. The two decided that there was a simpler way to solve their problem, one that did not involve remittances. Hinrikus started transferring money into Käärmann’s account in Estonia, while Käärmann did the same for Hinrikus in London.
Bypassing the banks
“Very soon, we had saved thousands of pounds in bank fees,” says Hinrikus. After three years of carrying on like this, the pair realized that perhaps other people might have a similar problem. That’s when they decided to set up TransferWise, a service that acts as a middleman between two people like Käärmann and Hinrikus (Quartz explained how it works, and its Islamic provenance, in this post). Its biggest attraction, however, is not just the ease but the price: TransferWise charges £1 for anything under £200 and less than £5 for £1,000; it makes its money on volume and by not having to move money around borders.
The service went live in January 2011, a month after Estonia joined the euro. It received its first customer just 15 minutes later.
By last month, TransferWise had transferred $400 million of people’s money, along the way going from just two currencies (pounds and euros) to 21 today. Though Hinrikus is coy about precise numbers, he thinks TransferWise will transfer $100 million a month by the first half of next year. That is still tiny. The World Bank reckons global remittances will total $550 billion this year and grow to $707 billion by 2016. Western Union alone moved $79 billion last year. Yet the market is not necessarily the same either: You need a bank account to receive money through TransferWise, while it possible to get cash directly from Western Union and its ilk. And TransferWise’s users tend to better educated, wealthier, and from richer countries. It remains a European service at heart, at least for now.
An ever better union
TransferWise may never achieve Western Union’s scale. For one thing, the incumbent has a network of agents and ATMs in 200 countries using 120 currencies. TransferWise’s model relies on an existing banking network and Hinrikus sees the number of currencies it supports topping out at about 100. But the company is growing at some 20% (in terms of both number of customers and value of transactions) every month. And some of the biggest hitters in fin-tech, the en vogue term for tech startups that deal with financial matters, are backing it: Max Levechin, a PayPal co-founder, was among the first investors. In May, Peter Thiel, another PayPal co-founder, chose TransferWise as his first European investment (paywall), putting in $6 million. The company has so far raised $7.3 million.
That money, as well as all revenues, are being plowed back into growing the company, Hinrikus says. TransferWise recently added Indian rupees and South African rand to the list of currencies that money can be sent to. Both countries are huge recipients of remittances. They do not, however, send an equal amount back, which doesn’t really work with TransferWise’s model of mutual exchange. Rather than limit the service to countries with comparable levels of transfers, the model must change. “There will not be enough money coming the other way, so we have to work with institutional partners,” says Hinrikus. He is confident TransferWise can still keep fees at a fraction of banks. (This makes sense—as a large customer, TransferWise benefits from preferential rates not available to individuals.)
The plan now is to continue growing and expanding currencies. TransferWise employs some 50 people and expects to grow to 100 by the middle of next year. Though Hinrikus would not disclose revenues, he says that if TransferWise stopped trying to expand and rid staff not essential to supporting the service as it exists today, he could be profitable next month. “But that would be optimizing for the local optimum,” he says. “Rather we’re optimizing for the global optimum.”