Money transfers are becoming increasingly more convenient, and here’s why.

For better or worse, we live in an internationalised world. Despite Brexit, despite the current travel ban, this fact is especially true here at home. In 2018, we exported 291 billion GBP worth of goods to the European Union alone.

We are a nation that travels frequently. Seventy-six per  cent have a passport, and 17 er cent of us took a trip abroad in 2018. And, thanks to the connectivity the internet provides, more UK workers and businesspeople than ever are doing their work overseas.

Because of all this, international cash transfers to/from the United Kingdom are commonplace these days. At first, we moved money through the banks. But, even back then, we knew we were getting the shaft on cost.

However, once online money transfer services like Transferwise and Revolut exposed all the dangers and pitfalls, their businesses grew exponentially.

Will the day come when these businesses supplant the banks and Western Union? That’s a question we’ll endeavour to answer in today’s blog.

The Story of Transferwise

Not so long ago, Transferwise and Revolut were nothing more than an idea in some entrepreneur’s head. Nearly a decade later, both have a significant following among the internationally-minded. How did these enterprises rise to dominance?

Let’s start with Transferwise. This money transfer firm got its start in 2010. At that time, two Estonian friends had a common beef. Both were getting gouged by banks on monthly international money transfers.

Taavet Hinrikus, employee #1 at Skype, got paid in Euros but lived in London. Kristo Käärmann also lived in London, working for professional services firm Deloitte. However, he had a mortgage to pay back in Estonia.

Both lost an average of 5 per cent on each transaction. One day, though, the friends had an epiphany — why not transfer money to each other locally? First, they looked up the interbank rate (i.e., the real price of exchange.) Then, Taavet paid Kristo’s mortgage. In return, Kristo compensated Taavet on the UK end. Finally, Kristo paid out Taavet’s monthly salary, whilst Taavet reimbursed Kristo on the Estonian side.

The arrangement worked out beautifully. After several months, another idea occurred to them — how many others were in the same predicament? This light bulb moment lit a fire under the pair. Through the rest of 2010, they worked to put together a money transfer service based on their arrangement.

In 2011, they launched, providing international money transfers at the interbank rate. They made money by charging nominal fees on transfers — usually, it’s around 0.5 per cent.

By the end of 2011, they had moved 13.4 million USD. The following years saw torrid growth. By 2018, they were running 4 billion GBP per month through their wires. Today, it is the world’s second-largest non-bank money transfer service — only Western Union moves more cash.

Transferwise is still a private company. However, according to analyst estimates, the company had a worth of approximately 3.5 billion USD in 2019.

The Origins Of Revolut

Like many his age, Nikolay Storonsky loved to travel. Whenever his demanding schedule as a trader allowed, he was off exploring the world. However, as he withdrew cash remotely, he noticed how badly he was getting ripped off.

Determined to build a solution, he teamed up with developer Vlad Yatsenko. With the assistance of Level39, a tech accelerator in London, they launched Revolut in 2015. From the beginning, this company focused on offering digital banking services, an area where the banks have lagged.

After starting with virtual bank accounts denominated in GBP and EUR, they now offer them in 19 currencies. In addition to that, they issued their own prepaid card. Customers can use them to withdraw money at their rates, which are far better than your average bank. On top of those core offerings, Revolut also has a crypto exchange and a stock trading platform.

In 2016, Revolut took in 2.4 million GBP in revenue. By 2019, that number exploded to over 58 million GBP. Whilst they are still logging net losses overall, that’s because they are aggressively reinvesting revenue. This growth focus has ballooned Revolut’s net worth, which analysts estimate to be around 1.3 billion GBP.

More Companies Are Following In Their Footsteps

The success of Transferwise and Revolut have inspired dozens of startups to launch in their wake. Of them, several stand out. For those who send cash to relatives abroad, Remitly has been a game-changer.

For years, they have relied on providers like Western Union (WU). The problem is, WU and others have long charged obscene amounts in exchange rate margins and fees. As recently as 2012, some institutions charged as much as 12 per cent of the send amount in charges. Even today, costs average about 7 per cent of transfers.

Remitly has challenged Western Union, Ria, and the banks on their turf. For many markets, they are one of the most cost-effective options. For example, the total cost when sending remittances to agents is 1.18 per cent to The Philippines, compared to 12.29 per cent through WU.

What about business transfers? Whilst smaller companies have been using Transferwise, established firms will want access to a broader slate of services. OFX provides these businesses with more than just excellent currency exchange rates. This Forex veteran can send hundreds of transfers at once (great for paying a remote team.)

OFX also offers hedging tools like forward contracts and limit orders. Forwards are particularly useful at this time of global chaos. In March 2020, they’ve saved countless clients from exchange rates that shifted radically in response to the coronavirus meltdown.

On the other hand, changing rates have benefited some customers. Some have set limit orders to buy at prices that would have been unthinkable last month. Thanks to market chaos, they’re getting them.

The Banks Aren’t Competing — Here’s Why

Through all of this, banks have barely lifted a finger. Given the gains that companies like Transferwise have made, this makes no sense. Why are they unconcerned?

First of all, many of their most loyal customers are older. Being less internet-savvy, many fear that online alternatives are scams, or too unsafe. So, they stick with the devil they know rather than the one they don’t know.

For now, banks can coast on this. Apart from the loyalty of their customers, foreign exchange only accounts for a small portion of their profits. In 2016, foreign exchange only accounted for 10 per cent of Santander’s net profits.

In time, though, younger generations will make up a commanding majority of consumers. When this happens, banks will have no choice but to adjust.

The Future Belongs To Online Money Transfer Providers

Globalisation and the internet have transformed society in the twenty-first century. So far, though, banks have been able to stave off disruption. Thanks to the rise of fintech startups like Transferwise, though, the day may come when their number comes up.

Image by Nattanan Kanchanaprat from Pixabay