Turning foreign exchange into a startup ‘unicorn’
Pair who created TranserWise, which allows people send money around the world for a small fee, say the Canadian market is ripe for major change
Kristo Kaarman and Taavet Hinrikus built a billiondollar business out of their common spendthrift’s conundrum.
Kaarman was paid in British pounds at his job in London, but needed euros to pay off his student loans in Estonia. His countrymate Hinrikus was getting paid in euros through a bank account back home, but living in London and spending pounds.
Both were frustrated with how much money they were losing to their banks when transferring money to and from their own accounts. So they decided to invent a new system. The two partnered to create TransferWise, a peerto-peer foreign-exchange swap system that changes the way consumers in 60 countries send money abroad.
“I realized the way it works is the bank just uses a different exchange rate,” Kaarman said in an interview with the Star ahead of TransferWise’s Canadian launch in April.
“It’s a very sneaky trick by the banks to fool you into thinking there’s a fixed rate and actually they’re taking a fee,” Kaarman said.
Since its founding in 2011, TransferWise has become a “unicorn” — a startup worth more than $1 billion — and attracted investors including Sir Richard Branson and PayPal founder Peter Thiel.
It has been named Apple’s “most innovative” app.
The service entered the Canadian market this spring, enabling users to send Canadian dollars to any of the 60 countries and 35 currencies on TransferWise’s platform.
The company believes Canada is a market ripe for disruption, with more than three million Canadians living abroad and seven million people here who were born overseas. It estimates that Canadians are paying more than $1 billion in fees to transfer about $30 billion abroad every year.
TransferWise charges1.2 per cent to exchange money — about 80 per cent less than Canadian banks.
Bank customers don’t pay the “mid-market” rate you see posted on the Bank of Canada or see in the paper. They pay the consumer rate, which has bank fees baked into it, and, often, other fees as well. Those can add up to additional charges ranging from 2 per cent to 10 per cent of the amount transferred.
TransferWise’s app converts money at the mid-market rate — the rate that banks pay among one another and offer big business customers.
It then matches a request for foreign currency with a request for an equivalent transfer in the opposite direction — someone who has that currency and looking for Canadian dollars. The minimum fee is $4.
“This is almost like the sharing economy in the financial sense, in that there are other people who need those currencies and we’re just a tech platform that makes it move very efficiently,” Kaarman said.
The system verifies that both people have the money to swap, then makes the transfer. It can take up to two days to settle, though in more mature markets, that time is much faster.
Transfers from the U.K. to France, for instance, take less than 20 seconds.
TransferWise says it finds peer-topeer matches for 60 per cent of its exchanges on the top 20 currency routes. When it can’t, it exchanges money the old-fashioned way but doesn’t increase your fee.
It is one of a growing number of financial technology disrupters looking to take market share from the big banks. Competitors include PayPal owned Xoom and Seattle startup Remitly.
But disruption in foreign exchange is not entirely new. More traditional alternatives include remittance services, Western Union and small discount foreign exchange firms. There are also credit cards with no foreign exchange fees — though none are issued by the big banks.
In addition, CIBC maintains it is also “disrupting the market” with its elimination of upfront fees for international transfers.
But for the most part, major banks don’t care about competing on price because they know that 95 per cent of people are going to convert currency through them, said Rahim Madhavji, founder of Knightsbridge Foreign Exchange. In fact, he added, if they doubled their price, they’d just make more money.
Madhavji even uses the banks to run his business. He calls them to check the mid-market rate every morning, then uses it to set his own — adding 0.5 per cent.
“It’s very easy to look good when the Canadian banks are charging as much as they do,” he says.
His customers sign up for an account, then e-transfer sums to Knightsbridge, which buys currency wholesale and trades using the large foreign accounts he holds at the big banks.
Madhavji believes the foreign exchange industry is ripe for disruption — the way the mortgage industry was 40 years ago when options were confined to the big banks before hundreds of alternatives got in — forcing banks to be more competitive.
“They’re slow to react because people don’t know the difference,” he said.
“The reason our industry exists is to disintermediate the banks — the banks have had a good ride, but it’s your money, so why throw it away?”
“It’s very easy to look good when the Canadian banks are charging as much as they do.” RAHIM MADHAVJI FOUNDER, KNIGHTSBRIDGE FOREIGN EXCHANGE