Transferwise, the payments startup that once campaigned on an anti-bank message, launched a "borderless" bank account this week, demonstrating that for financial services companies, all roads eventually lead back to banks.
The company is piloting a Mastercard debit card tied to a "borderless" account from which people can withdraw funds in local currency and hold funds in 28 currencies. In doing so it's inching closer to bank territory while stopping short of becoming a bank. The debit card product is in a beta phase with 1,000 customers in Europe, but the plan is to roll out the product globally by early next year, said Joe Cross, head of global marketing and public relations at Transferwise."We're not going to apply for banking license, but with the physical card, in theory, it replaces your bank," he said. Similarly, SoFi, whose tagline was "Don't bank, SoFi," ultimately sought a banking license itself though it has since backtracked on that endeavor because of a company scandal surrounding then-CEO Mike Cagney. No matter what the entry point is — personal loans, payments processing, small business loans — the direction seems to be the same: offering a more diverse suite of financial services products. Transferwise’s more obvious key competitors in the $429 billion global remittance market are money transfer companies like Western Union and PayPal; like any company, it needs to work with network of partner banks to deliver its product. Banks aren’t likely to launch a competing product because the market is too small and the international wires are a profitable revenue stream.
“Transferwise is coming at [the market] aiming at a problem they’ve identified that is a small part of most banks — the thinking is 'we can build a product that addresses this problem,' and it’s not a big part of any bank’s business that they’ll want to come at us,” said David True, partner at PagGility Advisors.
For now, the international remittance market is the domain of startups. Moreover, international currency transfers generate bank revenue from fees, leaving them with no incentive to compete with startups by launching cross-border debit cards or similar digital transfer services. Apart from what's seen as limited profitability for banks to launch similar products, rolling out a competing product would be also be hard for banks because of regulatory hurdles.
"Banks wouldn't do this for two reasons -- one is the size of the market they would go after, and banks make a ton of money off of cross-border fees," said Andrew Luca, a partner at PwC. "There's really not a lot of incentive for a financial institution to give you products that reduce that fee income."