Since its launch five years ago, the London-based company has been known for its ad campaigns. The splashy campaigns showed nearly nude employees in order to demonstrate that the company is more “transparent” than banks. This transparency is practiced in regards to fees for sending money across borders.
Despite its criticism of banks, Transferwise has quietly relied on banks to take care of the initial link between the company and the customer. In the U.S., it partners with a small New York bank called Community Federal Savings Bank, and in the UK., it partners with banks such as Barclays PLC.
As we watch Transferwise seek to move away from banks, we see yet another example of the complex relationship between traditional banks and fintech disruptors. While numerous startups want to displace banks, they also often depend on them in order to facilitate payments, deposits, or lending.
Transferwise was worth more than $1 billion in this most recent fundraising round, making it one of the most valuable fintech startups. Some of its investors include venture-capital firm Andreessen Horowitz, entrepreneur Richard Branson, asset manager Baillie Gifford and PayPal founders Peter Thiel and Max Levchin.
Transferwise was able to grow billions of dollars worth of transfers each year by working with banks. But working with banks caused problems, too. The problems were especially prevalent in the U.S. because each state oversees money transfers.
The company was sanctioned by regulators in New Hampshire for not having its own local presence. Consenting to the order, Transferwise repaid more than $16,000 in customer fees in New Hampshire. Since last year, Transferwise has been getting state licenses. In August, the company announced that it was able to directly access the U.K’s real-time payment system, although for now a small bank partner is still necessary to do this.
This access to the real-time payment system will allow Transferwise to move money without relying so heavily on banks. Taavet Hinrikus the co-founder and CEO of Transferwise, said that the company has always hoped to ultimately seek its own license. To do this, the firm would need to ensure that senders have the money in their accounts and that criminal are not using the service to send money. Transferwise stated that it was already doing these checks, but was using bank partnerships as a stepping stone.
Hinrikus said that one of the goals Transferwise hoped to achieve by working under its own state license was to make the service more simple and affordable. He also hoped to allow the services to offer more features. Hinrikus feels that Transferwise must act locally in every market and decrease the cost per payment in order to offer the best global service.
The fees are typically in the range of 0.7% to 1.5%, with smaller fees for larger transfers. The company also charges lower rates for the most popular routes. Transferwise now has licenses in 37 U.S. states and is allowed to work independently in three states that don’t require licenses. In the other ten states, Transferwise will continue to use its bank partners.
The journey to relying less heavily on banks is not over, but Transferwise is making impressive strides. Transferwise has advertised that it is more transparent than banks, and one day, it will may be able to truly cut ties with its competition.
David E. Mickey is a financial executive based in Buffalo, New York, and he’s an Enterprise Sales Executive at Docupace Technologies. Please visit his websites to learn more: http://davidemickey.com; http://davidemickey.net/; and http://davidemickey.org/.