I am sure everyone has once in a while criticized institutions and banks for exploiting their customers by overcharging customers during currency exchanges. Banks typically set their own exchange rates much above the real exchange rate and have several hidden costs that are not so apparent at the offset. A typical currency exchange through major banks could cost as much as 13% for a round trip exchange.
Enters TransferWise
TransferWise is a British peer to peer money transfer service established in 2011. It takes sharing economy concept to a different level as it allows the sharing/ exchange of multiple currencies directly between users of different countries, eliminating the need of banks. A person wishing to exchange Euros for Pounds can use TransferWise, which will find another person looking to convert his Pounds for Euros. Since the money never really leaves the country and is paid out from the local euro or pound account, users can avoid the costs associated with money transfers and banking fees. For example: Transferring from Pounds (£) to Euros (€), a typical £1000 transfer would result in the recipient receiving €1139.70 as compared to €1099.17 received while using one of the major banks. TransferWise charges customers 0.5% per transaction which is substantially lower than the transaction costs charged by major banks worldwide and takes lesser time as well for transactions.
TransferWise is a typical example of an industry disruption technology that challenges the power of long established institutions and forces them to change in order to compete. Since the transfer through TransferWise does not really initiate a transfer between countries and simply uses algorithms and technology to redirect money transfers locally, users are able to make use of this crowdsourced currency exchange and avoid currency values lost during conversion and transfer across borders. The company has seen huge growth recently and is currently moving over £500 million every month globally and covering 59 countries and 504 currency routes.
The TransferWise system can be compared to the traditional ‘hawala’ money transfer system that is still the primary source of money transfers abroad in Middle East, Africa and the Indian subcontinent. Under this system, ‘hawala brokers’ have an established network worldwide based on reputation and performance, and these brokers handle transfers without the actual transfer of money. For example: Consider a resident sitting in New Delhi wants to transfer a sum of ₹500,000 to his son studying in Rotterdam for his education, the hawala broker in New Delhi would simply call his contact in Rotterdam who will provide the Euro (€) conversion of ₹500,000 to the student. Note that no actual currency transfer is involved and the Rotterdam broker will simply get reimbursed in another transaction that goes the other way. However, there is very limited or no use of technology involved in this hawala process and has been working efficiently in these countries informally through an honor system for decades.
TransferWise has successfully replicated the same strategy and made use of Information Technology to its maximum potential. Just like Airbnb has turned every homeowner into a hotelier, TransferWise has been successful in turning every person into a broker (without them even thinking of themselves as broker). This particular example shows the power of disruptive technology to make use of existing methods and challenge the established methods with effective use of technology.
References and interesting articles to look at for further insight:
http://www.telegraph.co.uk/money/transferwise/how-does-it-work-and-is-it-safe/
http://www.n2moneymatters.com/2011/03/what-is-hawala-all-you-want-to-know.html
https://transferwise.com
Crazy High Currency Exchange Fees: How to Stop the Banks from Taking Advantage of You
