Marist Business Review

Finance  |  International Banking

How TransferWise is Revolutionizing International Banking

Currency Exchanges Made Easy — But For How Long?


By Max Darrington | April 12, 2018, Updated 1:10 pm 


Marist has become renowned for its outstanding study abroad programme, which see students traveling to all corners of the globe in the name of education. Students travel across the planet and experience the countless number of rich cultures modern society has to offer. Consequently, all students will often require international monetary transfers so they can withdraw their host country's currency to fund their cultural experiences. Typically, this can be done through a standard bank transfer, which will include an unfavourable exchange rate, a lengthy waiting period, and an expensive fixed fee. However, a FinTech Unicorn (a startup company valued at over $1 billion) has come along to save the day!


TransferWise is a peer-to-peer foreign currency exchange, which matches up two peers who wish to convert their currency into what the other peer has. For example, if someone was requiring a U.S. Dollars to British Pounds transfer, TransferWise would find a peer looking for a British Pounds to U.S. Dollar exchange and match these peers together. The system automatically matches the currency flows at real mid-market exchange rate (the price between buy and sell price). As one peer pays into a national TransferWise account, the recipient peer receives money from their respective nations TransferWise account. Consequently, the money never actually crosses borders. It is simply debited into a nation’s TransferWise bank account and withdrawn from the intended recipient’s country’s TransferWise account in their respective currency.

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With TransferWise there is no banking intervention, no hidden markup costs or unfair currency exchange rates, and the transaction can happen the very same day, making the following quote by Bill Gates seem all the more apparent: “Banking is necessary…Banks are not.”


TransferWise was founded by Kristo Käärmann and Taavet Hinrikus, two Estonian businessmen, who experienced challenges exchanging Estonian Kroon to British Pounds and decided to do something about it.  Hinrikus moved to the U.K. from Estonia in 2006, and he often needed to transfer money from his account in Estonia to his account in the U.K.. The trouble was that every time that he transferred money, he would be hit by transfer fees, often as much as 5%. At the same time, Käärmann was also working in the U.K., but he needed to continually send money to Estonia to pay his mortgage.


The idea for TransferWise surfaced when its two founders realized that they could cut down on money-transfer costs by paying each other's expenses. Hinrikus used his money in Estonia to pay for Käärmann's mortgage, and Käärmann used his money in the U.K. to send payment to Hinrikus. Consequently, in 2011, TransferWise was founded. Little did the two men know that their idea would have a valuation greater than $1 billion today.


How will TransferWise continue to grow?


TransferWise has a significant advantage. The innovation of borderless transactions by the founders has revolutionized the international online monetary transfer market for the customer, saving them millions of dollars a day. The idea of international transfers that never leave the country is clever and will definitely become a norm in times to come. The challenge for TransferWise is maintaining their “first mover” advantage in an area where it is difficult to create intellectual property and where the competitors are large. Within the venture capital industry (where investors finance in startups with a potential for long-term growth), there is a saying by Harvard professor Rosabeth Kanter that epitomizes the challenge for TransferWise: “When the giants learn to dance, it is time to get off the dance floor.”


TransferWise must establish a dominant position with a strong network before the big banks wake up to and try to stop the peer-to-peer model. There are signs that TransferWise understands the need for the development of their market position and market offering. They have recently launched the “Borderless Bank Account,” which leverages their peer-to-peer network to provide a global, “borderless” bank account, and it seems that people like this idea.  In May this year, Fortune Magazine said, “Banking across borders used to be an expensive pain in the neck until TransferWise found a better way to do it.”


It is the combination of problem solving, fast moving, and culturally-focused management that has allowed Käärmann and Hinrikus to build their global “Fintech Unicorn” with an associated $1 billion valuation. However, they are still only operationally profitable, which, in the real world, means not yet profitable. There is suspicion, like many fast-moving startups, that their real value will be to teach the “giants how to dance,” and they will then, probably quite lucratively, “get off the dance floor” via an absorption by one of those banking giants.