Innovation in the global money transfer industry was born out of chance in 2010 when two Estonian nationals living in London realized they share identical problems.
Taavet Hinrikus and Kristo Käärmann were both living and working in the United Kingdom capital but were paid in different currencies. Hinrikus was Skype’s first-ever employee and was paid in euros which he needed to convert to pounds to pay his regular bills.
And each time he converted euros to pounds, he was charged unnecessarily large fees from the bank.
Käärmann, on the other hand, worked for Deloitte and was paid in pounds. However, he had a mortgage to pay in his native Estonia so he had to exchange pounds to euros on a regular basis. Similarly, each time he had to convert pounds to euro, the bank helped themselves to a hefty fee.
What if instead of relying on banks the two individuals can help each other out by transferring each other pounds and euros at a much more fair rate compared to banks?
What was first an idea on how two friends can collaborate to save money between themselves turned into a business that shook the global money transfer industry? Fast forward to the 2020s and there are other money transfer services competing with Transferwise, giving consumers even more competitive rates and options.
How Transferwise Works
Transferwise’s original proposition to consumers was that it isn’t a traditional currency exchange platform. Suppose as an example someone needs to transfer $10,000 USD to euros.
Up until Transfwerwise’s creation, the process was uniform across banks and online services. The client’s $10,000 would be exchanged to euros at a market rate with an added commission of 4% or more and maybe even more in hidden or fixed fees.
By comparison, Transferwise oversees many accounts of different currencies across the world. So instead of going through the process of exchanging currencies in the open market, Transferwise merely adds the client’s $10,000 to its USD account and pays the receiver the equivalent amount of euros from its European account — known as the mid-market rate. The cost to the consumer for the innovative service varies from 0.55% to 2.85% with a fixed fee of $0.95.
The logic behind Transferwise’s business is that someone on the opposite side of the transaction will likely need to convert the equivalent of $10,000 euros to U.S. dollars.
Transferwise’s valuation stood at $3.5 billion in 2019 and it is easy to understand how. The company boasts more than 1 million users in dozens of countries who want to be part of a business model that offers savings of up to eight times what out-dated banks charge.
Transferwise oversees billions of dollars worth of transactions each month and new competitors entered the space looking to take market share away. Transferwise deserves credit for spurring a permanent shift to digital global money transfers but is it still the best?
Transferwise Versus Worldfirst
Competitors like WorldFirst preadte Transferwise as it operated as an international fund transfer provider since 2004. But WorldFirst realized it needed to either innovate or offer services that Transferwise doesn’t so it can carve out a niche.
One example of where WorldFirst excels over Transferwise is in forward contracts. A forward contract allows a buyer or seller to lock in a guaranteed exchange rate for a fixed amount at a predetermined date. This is especially useful for anyone that will need to transfer a large amount of money in one year and don’t want to risk being on the losing side of normal foreign exchange fluctuations while waiting.
Forward contracts are particularly useful for anyone looking to buy a foreign property. After all, a 2% unfavorable move in a currency pair can result in an extra $20,000 cost on a $1 million property.
WorldFirst is renowned for its forward contracts that allow a user to fix a rate for up to three years. Transferwise doesn’t offer any sort of similar service.
Transferwise Versus OFX
OFX might be a relic of the old ages as its roots trace back to 1998 when it was named OzForex. But make no mistake, this formidable Transferwise competitor is putting up a fight since rebranding as OFX in 2015.
One of the most notable characteristics of OFX is its willingness to match or even beat exchange rates offered by its competitors, including Transferwise.
OFX is also looking to dominate the higher-end market by waiving its standard $15 fee for all transfers over $10,000. This might sound enticing to new customers, but Transferwise’s ability to offer a mid-market rate is likely to still offer a better deal when factoring in all costs of the transaction.
Transferwise Versus Moneycorp
Moneycorp is yet another global money transfer service that felt compelled to invest in its technology to better compete in the global money transfer space. The company deserves credit for building a reputation in the corporate world.
Most recently, Moneycorp secured a strategic partnership with The CFO Centre, a provider of part-time CFO services. The partnership calls for Moneycorp advising organizations on how to best optimize foreign exchange revenues and global payments.
Conclusion: Transferwise Is A Champion
Transferwise is certainly a champion in the global remittances market but it faces fierce competitors in a fast-growing market. According to the World Bank, total remittances among low- and middle-income countries totaled $529 billion in 2018 and is expected to rise to $746 billion by the end of 2020.
The market is certainly large enough for many players, both new and old, especially given estimates for a further 11.75% compounded annual growth rate through 2024. One would assume that the large scale growth could prompt Transferwise to seek an initial public offering. This could give investors the potential opportunity to profit from the company’s unique business model.