As I’ve covered the evolution in financial services and fintech over the past decade with Tearsheet, I’ve had the opportunity to watch a handful of firms blossom into really big businesses. It’s a miracle really — an entrepreneur starting with just an idea and turning it into a unicorn. TransferWise is one of those rare companies and CEO and co-founder Kristo Kaarmann one of those rare entrepreneurs. As an international money transfer business, TransferWise now moves $4 billion per month and employees 1400 people.
I sit with Kristo to talk about the genesis of the company, but more importantly, where and how he’s planning for future growth. Partnerships have played an important role in Transferwise’s growth and Kristo shares how those partnerships are formed and how they’re structured. We talk about the state of the business and lastly, what he thinks about the whole challenger bank trend.
TransferWise’s genesis story
I was born in Estonia and moved to London for a new job at Deloitte. It was my job to meet with the big banks and insurance companies to help them modernize their systems and processes. This was 2007 to 2008 when tech was already going and getting faster and faster. Banks at the time were starting to realize they were falling a little bit behind.
Consulting experiences gave some inspiration for Transferwise but the real idea came from a very personal challenge. The good thing about moving to London is that my income got massively bigger than it was in Estonia. I had much more money to save. Once the Christmas bonus arrived, I was determined to move it back to my Estonian savings account.
The only natural way to do this at the time was to go to my bank HSBC and do an international wire. That was cool. The bank said it cost £15. When the money got back to my account, about 500 euros were missing. I thought someone made a mistake, fat-fingering a number on either side. After speaking with the bank, I realized it was I who had made a mistake. The realization was that HSBC used a very different exchange rate than I had expected.
TransferWise started as a solution to a personal problem
After calling a few other banks, I realized that this is exactly how banks work. If you see an exchange rate on Reuters or Bloomberg, it’s always the same — it’s the real mid-market exchange rate. But once you go to your bank, they use that and add five percent. That’s how they make money on cross-border currency flows.
I wanted to solve this problem for myself. I found that I had a friend who had the exact opposite challenge. He was moving money from Estonia to London — he was paid in Euros and his living expenses were in British Pounds. We started swapping money with each other. I gave my friend Taavet my pounds in the UK and he gave me euros in Estonia. It was just a bank to bank transfer and it didn’t cost us anything. We both saved hundreds of pounds/euros on both sides. It was a solution to our own problem.
We used this among ourselves for years. About three years in — 2011 — I realized that banks weren’t modernizing very quickly. We realized that it was worth figuring out if this was a problem that affected Estonians in London or whether it was a big bigger. It seemed to us that there was no other solution than talking to banks.
Banks need financial love, too
When we look at small businesses, they don’t really get a great banking experience anywhere in the world. In Europe, they get an even more expensive bank account than individuals do. In today’s world, it’s super hard to build a local business that isn’t importing or exporting or servicing customers abroad.
Everyone is thinking about going global from the beginning. The internet helps this immensely — anyone who sells online quickly realizes that their customer base isn’t just local to their town or country
We’ve seen lots of businesses snowball into using TransferWise. When we started in 2011, we just operated in pounds and euros. As we started getting emails from people that wanted to send money to different places around the world, we started adding currencies and connections onto TransferWise.
I think it was around 2014 when we added a small currency called Hungarian Forint. It’s a beautiful eastern European country. Suddenly the currency spiked. A lot of users came from Hungary quite suddenly. When we started asking our users how they came to us, a lot of them said that their bank recommended them to use TransferWise.
We dug deeper and found that there was a niche bank that was set up to do international money transfers, but it was pretty terrible for them. It meant that their customer had to come to the branch, a Windows 95 app had to be fired up on a terminal, a teller would have to input some information — it would be a whole effort to get it set up. The bank was set up but it was expensive and painful and all they got was a frustrated customer. Eventually, the bank coached the front office staff in the branches to recommend TransferWise, teaching customers how to download and use the app.
Banking partnerships and their contribution to TransferWise’s growth
There are a number of banks around the world where international money transfer is their bread and butter business. For most banks, doing cross border transfers is a necessity but it’s quite far down in their priority list. We found that the solution the Hungarian bank found for its customers was quite applicable to other banks.
The other thing we saw, we now have a lot of new startup challenger banks. N26 was the first one in Germany to launch and grow quite substantially. They also ran into an issue — they had all these depositors and were strong in making transfers within the Euro zone. When it came time to make international wires, they wanted to offer TransferWise themselves within N26s’s banking app.
That’s where we really got started. We opened up our API to N26 first so they could build their experience within their banking app for people to connect their N26 account with their TransferWise account. They could then just make the transfers in their banking app.
It’s a little like connecting your Google account to a third party mail app. As you can read your email from third party app, you can use TransferWise from third party apps, too. We actually use similar technology to this, as well.
With N26, we realized that it wasn’t just about them satisfying their customers. Many of their customers used to use us directly. Now, with an integration, they moved that activity back into the N26 app. This is great — the experience that their users get is much better if they use us in their banking app, rather than switching between apps all the time.