Given the relatively high-cost of most cross-border /
international money transfer schemes, is TransferWise the “cheapest” one out
there?
By: Ringo Bones
Like they say in those cold medicine adverts – “there is a
better way” – and in the world of cross-border / international money transfer
schemes, TransferWise is set up to be the better ones out there due to its
lower transaction costs in comparison to the competition. But is TransferWise
really is the better alternative out there?
TransferWise is a UK based peer to peer money transfer
service launched in January 2011 by Kristo Käärmann and Taavet Hinrikus
with headquarters in London. The commission charged is usually 0.5 pecent and
money is converted at interbank rate – i.e. also called overnight rate if the
term of the loan is overnight – in contrast other companies setting a premium
rate. In a peer to peer business model, the money a user is sending from their
own country is rather swapped with money someone else in the same country is
receiving – i.e. the local currency.
The creation of TransferWise was inspired by the personal
experience of one of its founders – Taavet Hinrikus and Skype’s first employee
and financial consultant Kristo Käärmann. As Estonians working between
their native country and the UK, they felt the “pain of international money
transfer” due to bank charges on the amount they had to convert from Euros to
pounds and vice-versa. In the words of Hinrikus, “I was losing five percent of
the money each time I moved it. At the same time my co-founder Kristo Käärmann
(also from Estonia) was starting to get paid in the UK and was losing a lot of
money transferring cash back home to pay for his own mortgage.
Exorbitant money transfer fees of conventional money transfer
service providers inspired the two Estonians to make private arrangements, with
Hinrikus – who was paid in Euros – putting this currency directly into Käärmann’s
Estonian account so that he could pay his mortgage without having to convert
pounds to Euros, while Käärmann returned the favor by putting pounds into Hinrikus’
UK account. This inspired them to develop a “crowd sourced currency exchange
service” to offer a cheaper alternative to established institutions.
From the customer’s point of view, money transfers via
TransferWise are not essentially different from conventional money transfers.
The customer chooses a recipient and a currency, the money to be transferred is
taken from his or her account, the transferring company charges the service and
some time later the recipient receives the payment in the chosen currency.
The difference lies in how TransferWise routes the payment. Instead
of transferring the sender’s money directly to the recipient, it is redirected
to the recipient of an equivalent transfer going in the opposite direction. Likewise
the recipient of the transfer receives a payment not from the sender initiating
the transfer, but from the sender of the equivalent transfer. This process
avoids costly currency conversion and transfers crossing international borders.
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