Financial firms are increasingly giving away their services for free

Not a bad deal.
Not a bad deal.
Image: Reuters/Sertac Kayar
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Zero is the most sought-after number in personal finance right now. TransferWise, for example, has spent years grinding down the cost of sending money across borders. The end goal is to make transfers as easy as sending email—meaning potentially even free.

“We haven’t proven that zero can be done, but we have proven that a company can move sustainably toward zero,” says CEO Kristo Käärmann. “If it’s not us, it’s going to be someone else.”

He says the fintech firm has already beaten its original goal. When TransferWise started out in 2011, its founders bet they could cut the cost of sending money across borders to 0.5% of the value of the transaction. The cost of transfers on some major routes has now dropped to around 0.3%.

Käärmann also says the quest is sustainable and profitable. It took almost six years for the company to break even, but last year the London-based firm had £67 million ($86 million) in revenue and £2 million in adjusted operating profit, according to filings.

They’re not the only ones racing to zero. Vanguard has long been at the forefront of low-cost investing, but rival Fidelity stole the headlines this month by announcing mutual funds with zero-percent expense ratios. Next week, JPMorgan Chase is launching a digital investment service that provides free trades.

But where do the profits come from if everything is free? TransferWise hasn’t disclosed exactly how it will get to zero, but scale is a big part of the strategy—as it is at companies like Vanguard, Fidelity, and BlackRock. Käärmann says the foreign-exchange and money transfer market is highly inefficient and fragmented.

When you’re big enough, you can charge seemingly nothing and still make money. “We’ve stumbled on a pretty enormous market,” the TransferWise boss says. “The benefit we get from scale is strong and seemingly never ending.”

But completely eliminating fees—that is, going to zero—is a different proposition from almost zero. Some companies may try to get customers in the door with free products and make a profit by cross-selling fee-based services. A financial firm that holds customer balances could also scoop up interest on those accounts.

In the meantime, TransferWise’s investors seem on board with the cost-slashing strategy. One of them is Jesse Beyroutey of IA Ventures, who recently said that “someone, somewhere will reduce global money transfer costs to 0.” He thinks a company that uses its size to reduce fees instead of raise them has more long-term potential than the price-gouging monopolies of the past.

So will the cost of international money transfers fall to zero in the next decade?

“I hate to make predictions, and 10 years is a long way, but we should get very close in 10,” Käärmann says. “We can get from here to zero, or very close to zero, in five to 10 years.”

The future of finance on Quartz

  • Low-denomination coins are increasingly useless and, frankly, expensive to produce. The Bank of England says getting rid of pennies wouldn’t spark inflation.
  • Electronic payment companies are soaring on the stock market. Adyen, which handles transactions for enterprises like Netflix, Spotify, and Uber, has surged since its blockbuster IPO in June.
  • China is targeting WeChat accounts to police cryptocurrencies. The messaging app with a billion users closed a number of accounts that provided news and updates on the crypto world.
  • Physical credit cards may be replaced by smart phones one day, but in the meantime London fintechs are attracting customers with fancy physical cards.
  • Speaking of digital wallets, Apple’s is catching on, but growth outside of the US has been much stronger than in its home market.

The future of finance elsewhere

  • WeChat launched its payment platform in Malaysia (paywall), its first Asian market outside of Hong Kong and China. Samsung Pay has now handled more than 1.3 billion transactions. And Ant Financial’s profit dropped (paywall) as it battles with Tencent.
  • The US Securities and Exchange Commission rejected another batch of bitcoin ETF proposals. Fraud and manipulation are among the agency’s top concerns.
  • Mexico’s next government thinks tech upstarts could boost financial inclusion. Officials may revisit the country’s fintech laws to find ways to expand banking services to more citizens.
  • Hacking is the future of insider trading. The Verge details the international criminal network that broke into Business Wire, which became one of the largest securities fraud cases in US history.
  • Robo advisors aren’t going to disrupt big financial institutions, according to a report by Morningstar and PitchBook (pdf). Up-selling to human advice, ironically, could boost profits for the new breed of wealth managers.

Previously, in Future of Finance Friday

Aug. 10: Tesla and Spotify say public markets have major flaws. Do they have a point?

Aug. 3: The most influential financial revolutionary is an 89-year-old with no interest in crypto

July 27: With or without Amazon, asset management is getting disrupted