Look out, Western Union. A new startup is making it easier – and a lot cheaper — for Americans to send and receive money overseas and it's attracted funding from big name investors like venture capitalist Peter Thiel and Virgin Group founder Sir Richard Branson.
Typically, U.S. banks impose fees as high as 12% per international transfer, while a World Bank study found money transfer juggernauts like Western Union and MoneyGram average fees of 9% of assets sent.
TransferWise, a UK-based startup that opened its first U.S. office earlier this year, uses a clever loophole to make it possible to send money to other countries.
How it works: TransferWise acts like something of a matchmaker for people looking to send cash overseas. When a customer in the U.S. wants to transfer funds to, say, a relative in the UK, TransferWise receives their cash in dollars and looks for a customer in the UK who happens to be looking to transfer pounds to dollars. Since no bank ever gets involved and money doesn’t actually cross national borders, TransferWise is able to charge very little in the way of fees — just 1% per transaction for U.S. customers., who also get better deals on exchange rates.
“There’s just no need to charge as much as many of these companies do,” says Joe Cross, general manager of TransferWise’s US operation.
Since launching in the UK in 2011, TransferWise has been valued at $1 billion and secured funding from major investors like Thiel and Branson. In a statement to Yahoo Finance, Branson said of his $25 million investment in the company: “Foreign exchange has been ripe for disruption for decades and it’s great to see start-ups like TransferWise bringing transparency to the market — offering better rates, great customer service and an ease of use that is transforming its market."
The company is able to offer exchanges for only 22 currencies so far with plans to add more. In countries where the amount of money coming in does not quite match the amount of funds sent out (which is common in developing nations), TransferWise steps in and acquires currency from local vendors itself. This is an additional cost to the company but so far they’ve chosen not to pass it along to customers.
The market opportunity for TransferWise’s business in the U.S. is substantial. One in eight Americans is foreign-born, the vast majority of whom hail from Latin American and Asian countries. The U.S. is the no. 1 sender of international remittances, accounting for more than one in five transactions, according to the Pew Research Center.
Jordan McKee, a mobile payments analyst, says TransferWise is “nimble and opportunistic” enough to pose a serious threat to traditional wire services.
“International money transfer remains a glaring area of banking in need of fixing,” he says.
But like most startups that have lofty dreams of putting bricks-and-mortar financial services out of business, McKee says banks are still winning in one front: “While large banks may score poorly in terms of fees and experience, they earn high marks for trust, a powerful attribute that cannot be understated.”
Whether Americans will put their faith in a new startup like TransferWise is yet to be seen, but the success of other mobile-first payment platforms like Venmo could bode well for the company. One thing for sure is that they won’t win favor without stiff competition. There are dozens of other startups looking to disrupt international money transfer business, including peerTransfer, which targets international college students, and Hellobit, which uses bitcoin to complete transfers.
Cross says the majority of U.S. users so far have been expats who live in the U.S. and may have property or family to support abroad. In the UK, college graduates like French national Guillam Agis, 25, use the service to pay for student loans back home while working abroad.
“My friends used it and gave me really good feedback,” says Agis, a software engineer. “I can save more money with them than with my bank so why not?” He’s used the company to make student loan payments from his UK bank twice so far.
Remittances to developing nations topped $435 billion in 2014, up 5% from the previous year, according to the World Bank. Western Union is the dominant player in the sector, handling nearly $1 of ever $5 wired around the world, according to the Economist magazine. The company was responsible for moving $85 billion in 2014 alone from its network of half a million agencies. Despite its onerous fees, it has a clear advantage over TransferWise: supporting cash transfers, as opposed to bank account transfers.
But Cross and his team aren’t bothered by Western Union’s ubiquity, nor the fact that TransferWise’s digital-first platform is inaccessible to the nearly 10 million Americans who are considered unbanked.
“I think it would be mental for any startup now to think they could create such an extensive network of bricks-and-mortar storefronts [as Western Union],” he says. “The world is going less and less cash-based. We don’t really want to provide a cash service. We feel there’s enough people in the world...to keep us busy for a long time.”
There’s at least one other part of Western Union’s legacy they don’t intend to mimic — the prevalent use of cash-based money transfer services to precipitate fraud (a la “Nigerian Prince” scams).
To that end, the fact that TransferWise doesn’t allow cash-only transfers is a positive thing. It’s much harder to remain anonymous when transferring funds digitally, thanks to strict international anti-money laundering regulations. In that regard, TransferWise plays by the same rules as traditional banks, as well as requiring proof of ID and in some cases a Social Security number before transfers can be completed.
“We have to adhere to [regulations] down to the letter,” Cross says. “It’s something we’ve taken seriously from day one."
For more on how TransferWise works, check out their video demo here.