#Asia Transferwise: Banks are greedy – that’s why they’re losing out to fintech startups


Transferwise CEO Taavet Hinrikus talks about how his company is disrupting banks at Tech in Asia Tokyo 2016. Photo credit: Tech in Asia / Michael Holmes.

Transferwise CEO Taavet Hinrikus talks about how his company is disrupting banks at Tech in Asia Tokyo 2016. Photo credit: Tech in Asia / Michael Holmes.

Banks are losing business to fintech startups. But just how much?

“Ten years from now, 30 percent of financial services in the world will be owned by tech companies,” Transferwise co-founder Taavet Hinrikus told the audience at Tech in Asia Tokyo 2016.

He had tough things to say about the banking industry. He said its business model is “outdated” and will start “crumbling and falling apart.”

Even if, say, banks are quick to adopt technology, most of it has been put to use for their own selfish desires and not their customers’ welfare.

Customers know that, he said, that’s why they’re turning to fintech startups that can offer cheaper, faster, and better services – options that weren’t really available before.

“It was 10 years ago, during the financial crisis, when we realized that’s there this whole bubble built by banks to serve bankers’ greed. How much did consumers benefit from that? Not much.”

“What the banks are doing is not working for customers. If you look at history, then you’d see that whenever that’s the case, sooner or later that industry will be turned on its head,” he explained.

He mentioned Skype – where he was the first employee – and what it had done to the telecommunications industry. In 10 years from its launch, he said Skype was allowing people to make long distance calls.

“We’ll see something similar in banking […] Banking has been dominating for way too long and we’re kind of getting to the end of the cycle now,” he opined.

More transparent than banks

Taavet recalled how he and his co-founder, Kristo Käärmann, were themselves victims of this greed.

Taavet joined Skype during its early days in Estonia. At one point, the company moved him to London, but his pay was still coming through his bank account in Estonia. Every month, he had to go to his Estonian bank to ask it to wire his money to his bank in London. The first time he did it, he sent a thousand euros and the bank told him they would charge 20 euros. But more money went missing.

“First of all, the money took three to four days to arrive. I was sending a thousand euros and I should have received 800 pounds, but what I got was 750.”

He found out that the difference accounted for the foreign exchange spread that the bank charged on top of the remittance fee.

“That’s what really pissed me off. [The bank] was just not being honest about it, not being transparent. I don’t think that’s fair.”

His co-founder Kristo had experienced the same thing wiring money cross borders. So they started Transferwise.

Photo credit: Moyen Brenn .

Photo credit: Moyen Brenn.

Transferwise lets you save on fees when you make transfers between international bank accounts. The startup features a peer-to-peer model. If you have euros and want to send pounds, it will automatically match you with people who want euros and give you pounds.

Taavet said banks and traditional money transfer firms like Western Union charge between 5 and 10 percent of the remittance amount – way more expensive than Transferwise’s 0.5 to 1 percent cut.

But that’s not all. Whereas banks take up to four days to wire your money, Transferwise does it “faster than the speed of sound.”

The service’s users, made up of businesses and individuals, transfer US$1 billion in cash each month. With a better rate and a faster service, the startup claims it saves its users US$1 million per day. That’s serious money – enough to turn users into loyal customers.

Taavet said the international money transfer market is a big one. “There’s 200 million people who work, live, or study abroad. We’re estimating there’s between 5 trillion and 10 trillion dollars that move across country borders every year.”

Backed by several high-profile investors, including the esteemed Silicon Valley VC Andreessen Horowitz, Transferwise is now estimated to be a unicorn, worth exactly US$1 billion.

Transferwise Japan launch

Transferwise CEO Taavet Hinrikus (left) interviewed onstage this afternoon at Tech in Asia Tokyo 2016. The interviewer is Nao Kitazawa, COO of Money Design. Photo credit: Tech in Asia / Michael Holmes.

Building trust

Taavet said Transferwise’s secret sauce has two key ingredients.

“One is courage because the biggest thing that stops people from doing things is when you look and become puzzled by the amount of complexities. You just need to go and break the problem into pieces – brick by brick – and you end up with distinct problems you can solve.”

The other one is trust. How can you get users to trust you? “Of all those bricks, this one is the hardest,” Taavet pointed out.

He said it’s crucial to make it work for your customers especially the early adopters who can spread the word about your business. Currently, he said the biggest source of new customers for Transferwise is its existing users.

Relationship with banks

In terms of operations, one important piece of the puzzle they had to figure out early on was liquidity, or how to make sure they have enough of each currency on both sides to enable the conversion.

“The first evening after we launched, we realized we had more pounds than euros,” he recalled. “So basically we had two options: one is to tell one side to wait forever and second is to figure the shit out.”

“We knew the only way to grow our business is to fulfil customer orders. In the first evening when we launched, I exchanged pounds to euros at a bank and I paid like 3 percent and made the customer happy.”

The next step was to industrialize this process. That’s when they started setting up relationships with banks and financial institutions where they can buy liquidity for a certain price.

So while they want to kick banks out of the international money transfer business, Taavet admits they need banks to resolve one component of their operations. This could be a new revenue stream for banks, he said.

“Banks have to go through major reengineering, but additionally, there’s an opportunity for banks to become a platform for servicing fintech companies. That could be an exciting business long term.”

Transferwise initially focused on Europe before expanding to the US and Australia last year. It began its big push in Asia last week, launching its service in Japan first.

The Asia push will continue with New Zealand, Singapore, and Hong Kong coming next, Taavet shared.

This is part of the coverage of Tech in Asia Tokyo 2016, our conference that took place on September 6 and 7.

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