ELIJAH MIGUEL R.

DAYRIT ECONOMICS 01

1AFM PROF. E. VIRAY

______________________________________________________________________________

“Sending money across borders is

becoming cheaper and easier”
By: Special FX

Source: The Economists, April 2019 Issue

Fintech start-ups are disrupting the international money transfer market OF AMERICA’S
hired farmhands, about half are undocumented immigrants. Many are unbanked, which
makes it hard for them to send money home. Some drive home in trucks laden with
gifts, and return with lighter items—high-sugar Mexican Coca-Cola is popular. Even for
migrants who use formal channels, cross-border payments are an expensive chore.
Remittances to developing countries are set to reach $550bn this year, beating foreign
direct investment, the World Bank said on April 8th. Buoyed by e-commerce, cross-
border transfers to and from individuals and small businesses come to $10trn a year. A
hefty chunk is taken in fees along the way. The middlemen benefit: on April 9th Finablr,
a payments and exchange group based in the United Arab Emirates, said it would seek
to raise over $200m on the London Stock Exchange, in part to invest in expansion.

Some fintechs are trying to disrupt the cosy status quo. So far they have only nibbled
around the edges of the market. But that may be about to change. In a world made
smaller by Skype and instant messaging, “why does money still go on a donkey?” asks
Taavet Hinrikus of TransferWise, a London-based fintech that typically charges a tenth
as much as British banks. Money transfers are a crooked racket. They’re designed to
hide just how much cash they steal from immigrant workers sending funds to family
back home. Western Union, Moneygram, even PayPal’s Xoom trumpet that they only
charge around $5, but quietly pocket people’s money by setting their own unfair
exchange rate.

Today the hot financial tech startup launches money transfers between the U.S. and
Mexico with a flat 1.5% fee. The bank account transfers are upfront, transparent, and
four times cheaper than the average cost to send money to Mexico. If you gave
TransferWise $100, the recipient in Mexico would get 1683 pesos after the real
exchange rate and 1.5% fee. Give Western Union $100, and the recipient only gets
1622 pesos after the inflated exchange rate and fee. Typically Western Union charges
4.63%, PayPal Xoom charges 4.95%, and CitiBank absolutely gauges customers with a
12.4% fee.

These remittance services advertise a low flat fee of a few dollars but get away with
robbery by baking a rip-off exchange rate into their websites’ transfer calculator. A tiny
asterisk leads to a warning about the shady rate. “That money should be in families’
bank accounts over in Mexico” says Joe Cross, TransferWise’s General Manager for
the U.S.

The 1.5% TransferWise beta will open to 10,000 users for bank account to bank
account moves. TransferWise seeks to open the program and allow transfers via credit
card, debit card, email addresses, or phone number in February.

U.S. to Mexico is the world’s largest international payments corridor, seeing $24.4 billion
sent along the route in 2014. It’s a huge market for TransferWise that will prove whether
its system scales. Simply by eliminating the brick-and-mortar offices, marketing, and
some of the exploitative profits of its older competitors, TransferWise could disrupt a
terrible burden on needy families

With $90 million in funding over the past five years, TransferWise has blossomed into
one of the premier fintech startups. The 400-employee British company now moves $1
billion a month between customers in over 50 countries. Its A-list investors include Peter
Thiel, Richard Branson, Index Ventures, SV Angel, and its $58 million Series C was led
by Andreessen Horowitz.

TransferWise was co-founded by Skype’s first employee Taavet Hinrikus, who knows
plenty about using peer-to-peer technology to undercut international businesses that
overcharge customers. He already did it to long-distance calling. Hinrikus came up with
the idea for TransferWise when living in Estonia while future co-founder Kristo
Käärmann lived in the U.K. Both were trying to send money to the country where the
other lived and were getting ripped off by transfer services. TransferWise was born
when they realized they should just deposit equal amounts of money into each others’
local accounts rather than making opposite international transfers.

TransferWise launched in the UK in 2011 with this p2p method before expanding to
more of the world. The startup matches a user sending money out of a country with one
receiving the same amount there, moves the money locally, and can thereby charge a
much lower and transparent fee since the money never went abroad.

The new U.S.-Mexico corridor will work differently since it’s not nearly as reciprocal.
Most of the time, immigrant workers in the U.S. are sending money back to their families
in Mexico. In this case, TransferWise doesn’t use its p2p system. Instead it sends the
money traditionally, but offers the real exchange rate and only charges a flat 1.5% fee
up front. TransferWise’s size lets it negotiate cheaper bulk rates, so it can pass the
savings on. It’s a clear example of software eating financial services. What old school
companies do with huge numbers of physical stores, TransferWise can do with a few
engineers. It’s the same as how Robinhood’s app offers zero-fee stock trading because
it lacks the overhead costs that force E*Trade to charge $7 per trade. Cross sees
student and small business loans as targets for disruption. SoFi just raised $1 billion to
chase this social lending market. The unbundling of overpriced financial services by
lean, software-based startups is poised to become a huge trend the next few years.
“You’ve got many different pressures on the old walled garden of the physical bank”
says Cross. “The Internet is allowing more stuff to happen online while the financial
crash had led to people’s trust in financial institutions eroding.”

Pickpocketing families with hidden remittance fees and more exploitative models
propped up other parts of banks. But now Cross explains “If we can take just find a
small piece [of the big banks] and unbundle it so we can offer it better and cheaper, it
will be way better for the customers. The little guys now seen [by the banks] as a
walking dollar sign are the ones being serviced by tech companies.” Other well-funded
startups chasing remittance include Azimo and WorldRemit, though both use the same
hidden exchange fees as the financial dinosaurs, they’re just not as high. Abra and
Coinbatch hope to sidestep fees through Bitcoin. But TransferWise’s real enemies are
the older companies with locations inside immigrant worker neighborhoods like San
Francisco’s Mission district.

The biggest challenge for TransferWise will be shaking customers out of their
unknowingly masochistic behavior of walking to a Western Union to send money. Many
don’t realize they’re paying for the marked-up exchange rate on top of the flat fee. They
aren’t aware of how badly they’re getting screwed so they’re not in the market for a new
transfer service. TransferWise will have to work to educate customers and hope word of
mouth kicks in across these tight-knit communities. Cross concludes “We’re on the cusp
on something massive where people think about apps when they think about money,
rather than banks.”

The Seattle Company has a mobile app that allows people in the U.S. to send money to
friends and relatives in the Philippines, Mexico and India. Oppenheimer, who is CEO,
was working at Barclays mobile banking division in Kenya when he realized how
expensive and time-consuming it was to send money internationally. In addition, while
more people across the world were using cellphones to communicate with relatives in
other countries, there was no easy way to send money from the phones. He set out to
create a service that was cheaper and easier to use than the entrenched leaders, such
as Western Union.
Remitly operates a mobile app that allows people in the U.S. to send money to relatives
or friends in Philippines, Mexico and India in up to three days. The funds can be
transferred from a debit card or bank account to a long list of partner banks or cash
pickup spots in the receiver’s country. Remitly sets foreign-exchange prices several
times a day and tells the user when they log in what the rate will be.

One of Oppenheimer’s main concerns is transparency; he wants users to always know

what’s going on with their money. The company charges a $3.99 fee for some
transactions and always explains the total cost before completing the transaction. The
app also shows the sender the day and time, down to the hour, the money will be ready
for pickup. Remitly expanded its services to Mexico just last month. Eventually the
company wants to make it global. Remitly established more than 11,000 pickup
locations in Mexico and said $24 billion is transferred between the two countries every
year. The company hopes to capture a part of that market.

Remitly said users of its service are sending more than $500 million every year. The
startup has raised more than $23 million in financing rounds, including a $12.5 million
round in March, led by Menlo Park, Calif.-based investment firm DFJ.

References:

 https://www.economist.com/finance-and-economics/2019/04/09/sending-
money-across-borders-is-becoming-cheaper-and-easier
 https://www.seattletimes.com/business/technology/remitly-offers-a-
cheaper-easier-way-to-send-money-
online/?utm_source=RSS&utm_medium=Referral&utm_campaign=RSS_all
 https://techcrunch.com/2015/12/14/software-eats-remittance/?ncid=rss