With mounting frustration at the costs and complexities of international currency transfers, online start-ups like CurrencyFair and TransferWise are taking on the banks with systems that minimise the middleman and directly link people wanting to exchange funds.
Before Taavet Hinrikus and Kristo Käärmann founded Transfer Wise they were just two friends living in London, with a shared dilemma. Hinrikus worked for Skype but he was paid in Euros while Käärmann earned pounds but had a mortgage to pay in Estonia. Their need to shuffle money across borders each payday was the catalyst for a simple agreement; the pair would deposit equal amounts in each other’s accounts, they used the Reuters mid-market exchange rate as a standard. They both saved the exorbitant commission demanded by their banks and before long they saw the scalable potential of their scheme to operate as a business all its own.
"The jump between mine and Kristo’s informal system and our business was simply trust,” Hinrikus explains
"I felt confident that Kristo, my long-standing friend, would send me the pounds I needed when I had sent him euros. I knew he wouldn’t pocket the money and go running.”
"So in order to expand the system, there needed to be a trusted middleman – today, that’s TransferWise, fully regulated by the UK's Financial Services Authority and HM Revenue & Customers. Customers send us the money they want to send abroad, we find a match in the currency they need, and then we pay out to the recipient.”
With the rapid pace of technological change it was only a matter of time before the principles of PayPal, Skype and crowd-sourcing were applied to the banking industry.
"We hope we can play a part in upending the whole industry,” Hinrikus says.
"Rather than asking ‘how much can we charge?’ we ask, ‘how little can we charge and still be able to build a global sustainable business?’”
CurrencyWise is another business with a similar model, however, they have already expanded their reach to include the Australian dollar (and 16 other currencies).
According to CurrencyWise founder Sean Barrett, the company has a simple set of goals: "Apart from providing a superior service at a fraction of the cost we also wanted to simplify the process and make it easy for people to understand and operate, while at the same time making the costs transparent. Banks are very good at confusing people and hiding fees.
"Users can complete the entire process online, no need to stand in line at the bank filling in forms. We also get complimented on the speed at which the transfers take place. In some institutions, international transfers still require forms to be filled out that then get sent on to a processing department, which increases the time it takes for the transfer to take place,” Barrett says.
These systems facilitate the matching of the exchange needs of disparate parties; which is all well and good until demand for one particular currency outstrips supply. The answer it seems is that both systems utilise scale and lean margins to top-up their client’s requirements as needed.
"CurrencyFair provides liquidity to the marketplace so that there is never a need to wait for another person wanting to do the opposite to you. We find about 50 per cent of users opt to take the best available rate, while the other 50 per cent make offers to these price takers. There are obviously still uneven flows especially in markets where we are still growing,” Barrett says.
With a commodity as generic as foreign exchange price is always going to be the decisive factor.
Laura, a designer based in Sydney, needed to pay a contractor in France and with little experience in international finance she was dismayed at the costs and processes involved.
"The first hurdle was all the forms, we had to get special codes for the foreign banks and provide identification,” Laura says,
"I was then told that I needed a plastic code generator to increase my transfer limit. The whole process seemed convoluted and in the end the commission and exchange losses cost us about 18 per cent of the transfer amount, which seemed excessive.”
And with the banks doing little to respond to such criticism, it may not be long before more start-ups like Transferwise and CurrencyFair start to challenge the incumbency of the world’s major banks.