According to a World Bank report, the global remittance market is expected to grow 3.75% annually over the period 2015 through 2017. Another report from LTP estimates that the US is the leader in the global remittance market with a 22% market share of the global remittance volume. The remittance market is dominated by three key players – Western Union, MoneyGram, and Ria. But these established players are facing increasing competition from startups that are able to offer lower fee structures and innovative technologies to provide online and mobile money transfer capabilities. One such new player is UK-based TransferWise, which recently joined the Billion Dollar Unicorn Club.
London-based TransferWise was founded in 2010 by Taavet Hinrikus and Kristo Käärmann. The two friends believed in the concept of allowing money to flow freely. Kristo was already a part of the finance world through his experience at Deloitte and PricewaterhouseCoopers. He helped the banking and insurance companies align their processes to new technologies. Taavet, on the other hand, brought in the technology expertise. He was the first employee at Skype and since then had worked at various companies as an angel investor and advisor.
The two friends were from Estonia and worked in the UK. They had themselves experienced the problems that arose out of transferring money across countries and knew of the exorbitant fee that some banks charged when it came to converting funds from one currency to another. At that time Kristo was earning in Pounds, but needed to make some mortgage payments in Euros. Each time he converted funds, he lost money. To help him out, Taavet put Euros into Kristo’s Estonian account and got Pounds from him in return. The arrangement helped them realize the need to create a currency exchange service that could offer a cheaper alternative to others.
It came up with a simpler way to make international money transfers. Instead of getting money to flow out from one country to the other, TransferWise uses its bank accounts in multiple countries to process the transactions. For instance, if a consumer wanted to send US Dollars to a UK-based Pounds account, TransferWise would transfer the US Dollars from the customer’s US bank account to TransferWise’s USD bank account, convert it at the mid exchange rate shown on Reuters.com and pay out the resulting amount from its local UK account to the recipient’s UK account.
To begin transacting, all customers need to sign up on their website and set up a transfer mandate. The recipient of the funds need not have a TransferWise account. The transaction takes anywhere from 1-4 business days depending on the method of money transfer, the verification time and the limitations in banking hours for both the sender’s and the recipient’s country. Businesses can also set up their accounts with TransferWise to transfer money to different countries.
TransferWise earns money by charging a transaction fee. For individuals, the fee varies based on the currencies and the volume involved. For sending US Dollars to the UK, the company charges up to 1% of the amount for the first $5,000 and then 0.7% on anything over. It levies a minimum fee of $3 per transaction. Compare their fee to PayPal’s Xoom which charges $4.99 for transferring up to $2,999 to the UK and uses a locked in currency rat for foreign currency conversions. WesternUnion’s fee is more comparable to TransferWise as it charges $5.00 for sending any amount up to $5,000 to a bank account in the UK, but it also uses a locked in exchange rate.
Its revenues are not known. As of early last year, market reports suggested that it had transferred more than $4.5 billion in transactions since inception and was witnessing growth of 15%-20% each month. But TransferWise is still suffering losses as it continues to invest in technology and market development. According to recent reports, for the year ended March 2015, TransferWise reported revenues of $13.8 million with a net loss of $11 million. Revenues for the year ended March 2014 had come in at $2.7 million.
It has been venture funded so far with $116.4 million from investors including Andreessen Horowitz, Baillie Gifford, Firestartr, IA Ventures, Index Ventures, Kima Ventures, Richard Branson, Seedcamp, SV Angel, and Valar Ventures. Earlier this year, it received $26 million in funding from Baillie Gifford at a valuation of $1.1 billion.
But given the brief insight into its financials, I have concerns on Transferwise’s valuation. Last year, PayPal had acquired a money transfer firm Xoom for an estimated $890 million. At the time of the acquisition, Xoom did much more than TransferWise. It allowed remittances as well as had the ability to allow customers to pay bills and recharge phones. Prior to the acquisition, Xoom was operating at quarterly revenues of nearly $42 million.