What exactly makes a business model ripe for disruption by technology ?
Is there a natural cycle after which every industry just gets replaced ?
In a digital world, this seems to have become the norm. However, one industry is still standing strong… but for how long?
To that regard, the banking industry is an interesting species. More than 4000 years old, it still continues to do so, despite being totally « outdated » in how it deals with customers. Banks have adopted technology to optimize the way things work internally, but when it comes to services their processes haven’t really changed for decades. (1)
Imagine a second, all the digital-enhanced creative destruction overhauling every single business from aviation to music. Yet, banking, seems to enjoy an enviable grace.
The nascent FinTech wave is posed to break that as its core premise is to offer customers what the banking behemoths never had: transparency, choice and lower cost. (2)
This undertaking is operated across many functions, one of which is : the money-transferring business.
Millions of immigrants maintain ties with their countries of origin, annually moving mountains of cash back home.
As an immigrant myself, I grew frustrated by the hefty fees of up to 15% (depending on service, type of transfer and location of the receiver) to send money to my family in Morocco. Currency exchange is a pretty sizable market involving 5 to 10 Trillions USD crossing borders every single year. It also happens, as is often the case with back-office financial operations, to be extremely inefficient and opaque.
Yet, just as the emergence of new technology enabled Skype to eat away telecom carriers’ dominance, so the banks’ grip on currency transfers seems ready for disruption.
Transferwise is described by Forbes as a « currency exchange unicorn that uses peer-to-peer technology to charge significantly less than the banks do to exchange funds from one currency to another ». (3)
To say the least, it has built a fast-growing business doing just that : digital currency-exchange business.
How does it all work?
In layman’s terms, Transferwise sets up a rolling network of money transfers, matching them so that funds never actually leave their respective countries, if there is a way to avoid it. Let’s imagine I am to send 30,000 Euros to the USD to pay for part of my tuition fees at Harvard Business School. Transferwise operates as follows :
- Offer the customer the real market exchange rate (no hidden fee or markup)
- As often as possible, match the Euros->USD wire transfer (outbound) with a similar USD->Euros (inbound) ; i.e. the money never actually crosses the border in most cases
- Charge a fixed fee of 1% on initial 5000 USD, 7% on anything over ; costing up to 8x less than a conventional bank transfer or remittance provider
Transactions are simply initiated by inputting bank or debit card information on the site or its mobile app. The service is also impressively quicker to operate than a regular wire transfer.
In so doing, Transferwise has defined itself as more than just a business. It is reshaping the way the industry’s organizational model, in a way that better fits millennials used to disruptive technology-based innovations such as Uber.
However, an objective assessment of Transferwise’s customer promise quickly outlines that it all hinges on one key attribute : scalability.
By matching wire transfers travelling in opposite directions, Transferwise suppresses the need for money ever having to cross borders, hence avoiding costly international fees. But, there is no guarantee to find a match on 100% of the transfers. In that specific case, Transferwise doesn’t use peer-to-peer, but wires the money traditionally via the real exchange rate and only charging a flat 1.5% fee.
What’s more, many pundits would argue that the countries where individuals send money are emerging markets where the average citizen can’t afford (or entertain the idea of) to send his meagre salary to a developed nation. Transferwise’s size lets it negotiate cheaper bulk rates, so it can pass the savings on.
Transferwise hopes to solve this problem by using the power of peer-to-peer networks to match both individuals and businesses together ; relying on emerging countries’ companies sending money outbound to fill in the gap. As the company grows, this seems to be its biggest challenge for the times ahead. One would wonder how sustainable the operating model will be if imbalance becomes more pronounced. Transferwise might have to lose the cost-advantage of P2P, or keep fund flows balanced but limit market growth.
Regardless, the movement of capital around the globe remains of preeminent importance in an increasingly globalized society. Customers who are sick and tired of the lack of transparency in banking now know they have a viable alternative.