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
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