A growing worry for banks is that tech companies are coming for their business, the same way Apple became a music distributor and Amazon invaded retail. The money transfer company TransferWise represents some of those anxieties: It offers cheaper foreign-exchange rates than banks typically do (and, if you’re keeping score, does it without blockchain). The London-based fintech unicorn is expanding into other services, like debit cards.
One of the things that’s kept tech firms out of the finance business in Europe and US is the sheer weight of regulation in the sector. Banks may hide behind this thicket of industry regulation for protection against tech companies, which could “steamroll” parts of the industry, said Bill Winters, chief executive of Standard Chartered bank, at a conference in London earlier this week.
This protection may not last: After five years of discussions, TransferWise is now the first non-bank to get access to the Bank of England’s payment systems, which will help it compete with the centuries-old financial institutions that have traditionally dominated foreign exchange. This direct connection should speed up processing—making it instant in some cases—and cut costs.
Consider the costs of transferring £1,000 to euros:
|Santander One Pay FX||€1,135.40|
|Source: Santander, TransferWise, TransferGo||Apr 17, 2018|
Even though they compete with banks, tech companies like TransferWise still needed access to banks’ platforms because they couldn’t access central bank systems directly. That meant a startup’s service and performance was in some ways only as good as commercial bank systems, according to TransferWise CEO and co-founder Kristo Käärmann. The Bank of England’s decision in July 2017 to allow non-banks to apply for the UK’s Real Time Gross Settlement (RTGS) will make it easier for them to skip over these intermediaries.
The UK is a leader when it comes to regulation that helps foster tech innovation for finance, which Käärmann says is a major draw for entrepreneurs. The EU also has licensing for payment providers that’s designed to help foster competition between tech companies and banks. For Käärmann, an important question is whether other regulators—namely, in the US—will do the same thing.
They may not have much choice. Chinese tech companies face fewer hurdles when it comes to financial regulation, and these companies have become highly innovative. Ant Financial, which controls more than half of China’s mobile payments market, is reportedly valued at $150 billion (higher than all but a handful of western banks). Shenzen-based tech group Tencent runs the payment and messaging app WeChat, with more than 900 million active users.
And, of course, there’s blockchain. Part of the reason people are paying more attention to payments these days is because of bitcoin, and the belief in some quarters that the blockchain technology underpinning it and other cryptocurrencies will revolutionize finance—including cross-border money transfers. Spanish banking giant Santander, after years of testing, recently launched a payment service that uses California-based Ripple’s distributed ledger technology.
Even so, companies like TransferWise and TransferGo appear cheaper than banks, including Santander’s service that uses blockchain. Daumantas Dvilinskas, the CEO and co-founder of TransferGo, said his firm is still considering using blockchain, which could cut its processing time from 30 minutes to seconds. TransferWise says it has considered using Ripple’s technology, but didn’t find enough benefits to use it. Käärmann says his company’s direct connection to the UK’s central bank shows there are ways to get around the slower legacy systems supported by commercial banks, and that payments can be cheap and fast using existing technology.