INSUBCONTINENT EXCLUSIVE:
You don&t have to follow the financial technology industry or work with developers in faraway lands to know TransferWise, arguably the world
leading peer-to-peer money-transferring startup
Thanks to its presence in more than 70 countries, low-cost rates for moving money internationally and, of course, its famous ¬hing to
hide& PR campaign that featured its semi-naked employees running through the streets of London and New York, TransferWise has become one of
the world most recognizable fintech brands
Along the way, the company helped usher in the age of the rebel-fintech adolescent startup that could compete and win against dusty
incumbents on the basis of transparency, value, technology and, perhaps most importantly, moxy.
But today, the macroeconomic, business and
political conditions that served as the feedstock to co-founders Kristo Käärman and Taavet Hinrikus when they launched TransferWise are
Can it keep scaling amidst heightened trade tensions, the unfortunate rise of xenophobia and capital controls Will it continue to grow
profits in the face of competition from other well-funded fintech startups and incumbents that look less dusty Does the company, which has
recently launchedimportant partnerships, a revamped &borderless& business offering and a Mastercard debit card, have aspirations to provide
other financial services And, why isn&t TransferWise public In the interview below, CEO Käärman addresses these questions head-on
In doing so, the Estonian native makes the case for his company future as a trusted partner for its dedicated (and growing) customer
base.
Gregg Schoenberg: It good to connect, Kristo
I recently took a look at your financials, which show that despite your fairly large size, you&re still growing at a very fast pace.
Kristo
Käärman: Yes, things are going very well
Tracking back to the very early days when we started, our hypothesis was that we can service customers about 10 times cheaper than banks
That was really proven out about two years ago when we reached break-even, which is an important proof point: tech that paying for itself
It not paid for with investors
GS: So it actually works.
KK: Yes, this thing actually works
In fact, in our original hypothesis, we thought that we could probably do our biggest trade routes for 0.5 percent in fees
We&ve now revised this and are now operating at 0.3 percent in our largest routes
GS: I assume that all in Because TransferWise always uses the mid-market or spot rate.
KK: Yes, and from the beginning, we&ve taken the
approach that we never hide anything in the spread
GS: Before we leave the topic of your financials, is there any color that you would care to give on how things are going subsequent to when
you reported your numbers
KK: Things are going in the same direction, which is consistent with the mission of the company: Grow the volume
and the customer base, which gives us more scale to enable us to charge skinnier and skinnier margins.
GS: Taavet has said that he knows the
moment when TransferWise transaction volumes will surpass Western Union&s
When is that
KK: We&re a little bit behind Western Union, but give us a few years
What more powerful Anti-trade factions or the natural forces leading us to become more global
GS: So it won&t be in
2019
KK: It might be, but I doubt it
Actually, you can kind of work it out, because Western Union is a public company and their volumes aren&t really growing very much
Today, our volumes are still smaller than Western Union&s
Then again, Western Union volumes are not very big compared to Citibank or HSBC&s.
GS: Speaking of volume, do you disclose your biggest
foreign exchange (FX) crosses I couldn&t find them on your site
KK: It not disclosed, but we make no secret about this either
Let me also preface this by saying that whenever we&re in the U.S., everyone brain immediately goes to U.S
But it not the biggest channel by far.
GS: Is dollar-peso high on the list
KK: Definitely, but the volumes there are much smaller
Our biggest volumes are in between the large developed countries
So you&ve got pound-euro, euro-pound, euro-dollar, pound-dollar, dollar-euro
That the biggest triangle
Then you&ve got Australia, Canada, Switzerland, Japan, Singapore, Hong Kong, etc.
GS: On that note, how big of a concern is it to when you
see a weakening of overall relations between the U.S
and Mexico and China and the Brexit saga To me, TransferWise has always been predicated on more frictionless, cross-border commerce
As you know, geopolitical forces are reversing those trends.
KK: Certainly, if everyone decided that they weren&t going to trade in other
currencies, there wouldn&t be a need for us
And I appreciate what you&re describing in terms of the public narrative that the intent of some factions
Whenever I get asked about trade tensions, I wonder, what more powerful Anti-trade factions or the natural forces leading us to become more
global Technology is one of those forces
Because it very hard these days to be a local tech business
So while not every future business will be a tech business, most will either be tech or have a lot more tech elements, which are naturally
more global.
TransferWise borderless account mobile card
GS: You&re saying that the global game of tariff-chicken and overall decline in
immigration between certain major countries isn&t on your CEO headache list and that they haven&t impacted flows
KK: No and no
Here a practical example: China has put into place capital controls, preventing residents from taking more than $50,000 U.S
dollars per year out of the country
As a result, they have already closed down the country from some aspects of money movement
I might disagree with that, but it their right
GS: That sounds like it can create quite a headache for you guys.
KK: It a bit of a headache for us, but we&re not that worried about
We just won&t bother with the Chinese market
I mean, we&re operating in so many countries around the world
It business as usual for us.
GS: Is a global recession and/or a global shock higher up your list
KK: I&ll answer that question by telling
you about the month of the Brexit vote, which was an outsized month for us in terms of volumes.
GS: High volume
KK: Yes, incredibly high
volume, but we didn&t market anything and we didn&t do anything
In fact, we closed down the service
Actually, you&ll appreciate this as a Wall Street guy—
GS: —Ex.
KK: Ha, my apologies
So a couple of days before the vote happened, we knew that whichever way the vote would go, there was going to be volatility that night, and
when volatility happens, the price rises, the smarter banks make a lot of money, which is usually not the case for consumers.
GS: Of course
KK: A few days beforehand, we told our customers that a storm is coming, and that if they needed to move money between pound and euro or
pound and something else, do it in the next 24 hours because we&re going to shut things down.
GS: You gave people fair warning.
KK: Yes, but
we were actually very stressed on the day we put out the notice
Would people accuse us of crippling the service Instead, people started thinking about how exchange rates were going to move
It ended up going really well and earned us kudos when things calmed down.
GS: What you&re saying is that in a recession, which will likely
accompany global freak-outs, you&ll protect your customers
But what you&re also saying is that volatility can be a good thing from the standpoint of trade flows going higher.
KK: Yes, but I don&t
like a recession.
There are cases where people who can transact internationally can switch from PayPal to us
If they can, they&re jubilant.
GS: Of course not
But some of the criticism hurled at TransferWise is that it a great service for when the weather is nice
And while large institutions charge too much for FX when times are good, in periods of volatility, they have more tools to manage risk and
ease volatility.
KK: In financial services, risk is expensive, and if we&re building a product where margins are getting thinner and thinner
— and we think they can get close to zero — it means that we see zero risk involved in it
So everything that we do is designed in a way that would take as little risk as possible
And I think you&re referring to mostly FX exposure, which is one of the types of risk that emerges if you don&t have balance on both
sides.
GS: Right.
KK: Then you either leave some people waiting for a little bit until you can match it out somehow on the market, or you&re
willing to cover that position until you&re able to take it off.
GS: Yes.
KK: So your assumption is correct, and it can be worth it to make
payments instant by taking a very tiny bit of a position
We&ve comfortably managed that
I can&t disclose the numbers, but you&d be surprised how small that position is compared to our volumes
Now, in the early days, when we were running the company on my money and Taavet&s, we had no way to put up capital to facilitate transfers
But we had a trick we used then, because we often had more transfers coming in from, say pounds to euros than from euros to pounds.
GS: A
big mismatch.
KK: We basically made a very large limit on the euro side — I think you could transfer like 50,000 euros at a single time
— and a smaller limit on the pound side, so you could only transfer 3.000 pounds.
GS: Is that something that you would still do if a
mismatch got bad enough
KK: We haven&t done this now for five or six years, but it an idea to create a balance synthetically.
GS: Let talk
about where the business is headed
I&ve seen a number of announcements that you guys have made
On one hand, you&ve hooked up with BCPE, and have deals in place with some challenger banks to help them facilitate FX transactions
These partnerships can enhance your volumes and take you one step closer to becoming the Amazon of FX for retail
But you also now offer a &borderless& multi-currency account for people and businesses that can be linked to a Mastercard debit card, which
seems to constitute an expansion of your relationship with some customers.
KK: In terms of integrations with the customers of our banking
partners, they now see how much they&re actually paying for a transfer
Plus, they get the same pricing as they would on TransferWise but with greater transparency
GS: You&re trading margin for dollars, right Because you have to share the fees with partners like BPCE, but that okay because they&re
bringing you lots of customers.
KK: Yes, but they also share in the cost
In terms of the debit card, it comes from two ideas
Think of an individual customer who often sends money to their own account abroad, or to their family
Why do they do this The answer is that they probably have a student loan or a mortgage to pay back at home.
GS: Just like you did.
KK: Right
So we asked ourselves, why don&t we make it easier for our customers to do it directly Avoid this hop from their bank in the U.S
to TransferWise, then from TransferWise to their bank in the U.K
and then from their bank in the U.K
Why don&t we let them do it from within TransferWise Because we actually have the payments infrastructure in 70 countries.
GS: Let talk
about your small business customers specifically.
KK: From the beginning, we&ve always accepted businesses as users
Over time, maybe the small business side has gotten more focus because it a little trickier and it needs more features
Specifically, while freelancers and businesses have always been very happy to use TransferWise to pay their suppliers, they still have an
issue when they get paid, or when they invoice their customers.
GS: Can you give me an example
KK: Let take a Swedish furniture maker, when
they sell their beautiful tables in the U.S
like the one we&re sitting at
That company would put their Swedish account number on the invoice, and then depending on how bold they are, they would ask you to pay it in
either Swedish krona or in U.S
Either way, one of the banks is going to do that conversion, while the customer is going to pay three or four percent of the invoice value
So now, with the borderless account, the furniture maker can hold the balance in different currencies
GS: That helpful, but not unique.
KK: It not exciting
HSBC has been able to do this for decades
But what they also get is a local account number in many countries, eventually in 40 countries
So now, they put their TransferWise account number on the invoice and it gets paid as a local business in the U.S.
GS: So you&re not trying
to compete against domestic-oriented banks, or for that matter, even PayPal
It just an outgrowth of who your clients are that you offer this.
KK: That fair, but I think we&ll overlap with PayPal a little bit
There are cases where people who can transact internationally can switch from PayPal to us
If they can, they&re jubilant.
I think the journey of money could be something similar to email
GS: Well, they like your fees, right
KK: Yes, exactly
On a related point, the card is a way to give people access to that money that they have in the borderless account
So the thought process wasn&t to do a bank and start with a card
The thought process was to make it easier to facilitate international lives and international flows within the borderless account.
GS: You
can&t even pay interest on that cash, because you&re not a bank.
KK: Correct.
GS: Taavet likes to give interesting quotes
One was, &We want to be as cheap as email one day.& As we all know, email is free
We also all know that when something is free, you&re the customer
It true in search and in trading stocks
With this in mind, have you been approached yet to sell your data
KK: No one ever approached me on data, and yes, we would like to be as
Actually, I think the journey of money could be something similar to email
But to be honest, my visibility goes from being able to move from a 0.5 percent charge to a 0.3 percent charge
I also think I know how to get from 0.3 percent to 0.2 percent
But going from 0.2 percent to 0.1 percent is going to be really hard, I can tell you that now
And going from 0.1 percent to 0, that I don&t have an answer for.
TransferWise Mastercard debit card
GS: If you want to remain transparent,
I mean, you guys used to parade through London without your clothes on to make the point that there no secret to how you earn money.
KK:
Well, I don&t know if we need to get to zero cost; maybe 0.1 percent is completely fine
But if some people want zero for some reason, then we could also transparently subsidize it from something else that they are willing to pay
for, or maybe someone else is willing to pay for them.
GS: Let talk about the future, then
Why aren&t you public
KK: But, why
GS: To do acquisitions, motivate employees, raise capital
There are all sorts of reasons why it could make sense for a growing, diversified company like TransferWise
I guess you&ve dipped your toe in those waters a little on the debt side, and I recognize that being public isn&t a walk in the park
Still, I&m sure you&re well aware that some megafund VC out there might one day pump mounds of equity into a competitor
KK: It a fair and relevant question, and we do want to be pragmatic about this
So the first question we&ve asked ourselves is: Do our customers care if we&re a public company or not The answer is that they don&t care
Then, we&ve asked ourselves whether it will enable us to do more
Of course, being public probably makes our capital cheaper, but we&re not really capital-intensive
You&re right that we might need that currency to make acquisitions—
Everyone had to create something so that they could
live.
GS: —But I understand that it reduces your flexibility and long-term planning a lot.
KK: Regarding a fund that would put a
huge amount of money into a competitor, let say a half a billion dollars, for example
I think if it was important, I should&ve done this already, but we haven&t
Plus, in order to deploy 500 million pounds, our customers are going to be paying interest on this, eventually
So we&d have to have a bloody good place to deploy that kind of capital.
GS: To close, I want to ask you about Estonia, because I&ve never
asked an Estonian this question: Your small nation has hatched Skype, Pipedrive and Taxify in addition to TransferWise
What in the water in your home country Because not all former Soviet republics have had Estonia success
And while Israel may be known as the startup nation, I think Estonia could also lay claim to that title.
KK: That a three-hour discussion by
I&ll say this: When I was a kid, the economy didn&t matter for people; independence mattered
And after having another country rule over you for 50 years, against your will, you don&t really care about how you&re going to eat next
GS: And then the Soviet Union collapsed.
KK: Which resulted in half the population basically becoming unemployed
Plus, we didn&t have an industry that was useful for putting food on the table or making a living at that time
Everyone had to create something so that they could live.
GS: You&re saying that it was a combination of this fierce independent streak that
was embedded into Estonia DNA combined with the lack of industry to rely on.
KK: Yes
It called entrepreneurship
GS: Ha, well in your case, it was perhaps a gift
Thanks for your time, Kristo, and great luck.
KK: Thank you, Gregg
