Monday, March 11, 2013


At the SIBOS industry conference in Toronto in 2011, I met Taavet Hinrikus and Kristo Käärmann, the founders of Transferwise. Taavet is a startup veteran, and one of the early employees at Skype, while Kristo is an ex-consultant with experience in banking. In an eerie way, they reminded me of Josh and myself at Simple. They had a similarly big vision - they wanted to take on the impenetrable world of international money transfers and make them secure, convenient, and super low cost. I eventually ended up becoming an angel investor in their seed round, as did Roger Ehrenberg at IA Ventures, who is also an investor in Simple.

I've lived and worked in Europe, India, Japan, the Middle East, and West Africa in addition to the US, so international wire transfers are near and dear to my heart. I've never made one where I didn't feel like I was being ripped off in some way. It used to be that ignorance is bliss, but as I've learnt more and more about finance, it's all to painfully clear how the big "Money Center" banks that control the forex markets rip-off retail consumers. Not only do customers get charged insanely high fees, sometimes in the order of hundreds of dollars, they usually get ripped off on the exchange rate too.

This was brought home to me vividly when my wife had to make a transfer from Spain to London last month. We haven't had occasion to make a large transfer in the last couple of years, and it occurred to me that Transferwise might be the best way to make this transfer. But I didn't want to use them just because I'd invested in them - I wanted to use them because they were the best. So I asked my wife to look at what other services she could use.

First up was La Caixa, one of the biggest retail banks in Spain. La Caixa has been a serial innovator in retail banking for years, and is probably the safest bank in Spain. My wife literally laughed at me when I suggested she try using them to make the transfer. As excellent as their branch and ATM network is in Barcelona, nobody in their right mind would use them for international transfers. They have the highest transfer fees of almost any bank that we've used, and even charge fees for transfers within the Euro-zone, in apparent contravention of the spirit of SEPA. La Caixa was a non-starter.

La Caixa's high fees drove my wife to open an ING Direct account in Spain a few years ago. They seemed more promising - after all, simplicity and transparency are part of their brand proposition. However, I still don't know what it would have cost us to make this transfer using them. Their website has a lovely pdf outlining their differential pricing structure for transfers, which is barely intelligible, even for  a native Spanish speaker like my wife. The document also fails to mention that you can do transfers in USD - which my wife found out much later. And there was absolutely no information we could find on their website on the exchange rate that we'd get on the transfer, or what the mark-up would be on the mid-market exchange rate.

At this point it was pretty obvious that Transferwise wasn't just our best option, it might be our only reasonable one. I cheated a bit - I pinged Kristo. Our transfer was a bit unusual in that we wanted to make a USD denominated transfer to an account in the UK, but Transferwise was able to take care of it. Exchange rates and costs are displayed on their front page, and they even refunded $500 into my wife's account a few days later because the mid-market rate on the day of the transfer moved in our favor.

The problem in financial services

It never ceases to amaze me how lousy bank interfaces are in general. ING is probably the best online bank in Spain, yet it is impossible for even sophisticated users to understand how their system works. And believe me, we tried, even going to the extent of placing an international call to their CR line. Getting an idea of the exchange rate was impossible, and even understanding the services they actually offered was hard. 

The problem is that bankers think like accountants. They build systems of accounts, with complicated ways to transfer money between accounts, and then expect users not just to understand those accounts and rules, but also to optimize them. And of course there is always a fee or a commission or a skewed exchange rate ready to trip you up somewhere in the fine print if you fail to do that optimization.

The startups are coming

It warms my heart to see more financial startups taking on the incumbents, and building and shipping awesome products to customers. This is probably a subject for a longer blog post, but I realised at Money 2020 last year just how many interesting new startups there are out there: Square, Braintree, Stripe, Betterment, SoFi, Zipmark, Payperks, and OnDeck Capital come to mind, and thats just listing companies where I personally know folks. There are dozens more out there, and its clear that there will soon be hundreds. The multi-trillion $ global financial services market is going to see some disruption.


  1. I would argue that one of the most important reasons banks have lousy interfaces is insufficient competition (which is also the culprit for high fees). Startups can provide such competition, and Transferwise is a great case study, but only in the parts of financial services' value chains not protected by high regulatory barriers to entry.

  2. Agreed. But startups such as TransferWise, Simple, Zipmark, OnDeck, Lending Club are making indroads even in areas that are heavily regulated. Its not impossible, its just much harder. Of course, if the regulatory barriers were lower, there would be dozens if not hundreds more.

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