Sunday, February 8, 2015

TransferWise: Money Transfer Scheme For The Masses?

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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