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Exchange Rates

UK startup chips away at banking transfer fees

The online service TransferWise undercuts banks international wire transfer rates by connecting people to currencies. The company's founders call current banking exchange practices a rip-off it wants to put an end to.

Dollars and euros

TransferWise will eventually be able to exchange dollars

British startup TransferWise, founded by two Estonians, announced that it had achieved $1 million worth of currency transactions since it began operations in January 2011. Unlike banks, which charge a percentage of the amount transferred when internationally wiring money, the online company takes a flat fee of one euro or one British pound for each transfer.

Taavet Hinrikus, one of TransferWise's cofounders and one of the original employees at Skype, told Deutsche Welle that TransferWise aims to "disrupt" the currency exchange market beyond the pound-euro, euro-pound exchanges it currently makes and by executing transfers for private as well as business customers.

Deutsche Welle: Tell me how TransferWise differs from a bank. I have a bank in Germany, and I want to send money to the UK, what do I do normally?

Taavet Hinrikus

Taavet Hinrikus, a co-founder at TransferWise, previously worked at Skype

Taavet Hinrikus: Normally you would go to your bank, and you would tell them: "I have 1,000 euros and I need to change it into British pounds and send it to the UK." And your bank would be happy to do it for you. However, what you might not know is that they would end up charging you 3 percent to 6 percent. That's 60 euros. The way they do it is to charge a hidden fee on the exchange rate and by charging you a one-time service fee for it.

Essentially they're not doing that much [work]. Charging up to 6 percent for this, is what I would call a rip-off. We've found a much better way of doing this. Say you want to change 1,000 euros into British pounds. There are certainly people in the UK who want to change their pounds into euros, and who have the same problem of wanting to avoid getting ripped off by the banks. What we're doing is matching up people in the UK with people in the eurozone and allowing them to exchange with each other, using the best rate on the market, and we charge a flat fee of one pound or one euro for it.

Where exactly does the money go? If I use the service am I sending my money to the UK, or to your eurozone account?

You would send your money to our account. We are a trusted third-party. There is this thing called the Single European Payment Area, where payments inside the European Union are essentially free.

How does TransferWise compare with a traditional transfer in terms of speed?

It may take slightly longer, but we feel that given the savings you get - that's a compromise people are willing to make.

Skype logo

Hinrikus said TransferWise aims to be just as 'disruptive' as Skype

If banks have historically been profiting from the currency fees, and one-time fees you mentioned, and you're just charging a euro or a pound flat per transaction, how can you possibly make any money?

If you think about what we're doing, it actually does not cost that much to operate. Our cost structure is much more aligned with the requirements for providing this service. There's no need for us to have a 30-story building with desks made of marble and mahogany, which a usual bank would have. We've just come up with a leaner bank structure.

You have a history with the Internet telephony company Skype, which was founded on disrupting the telecommunications infrastructure and lowering prices for consumers. Do you feel like some of that has rubbed off on you, in terms of currency exchanges?

Definitely. We've already been called the Skype of currency exchange. And sure, we have learned a few things from the Skype [playbooks]. I think the biggest thing that we've learned is that there's no need to be afraid of big challenges and disrupting large markets. The way Skype disrupted the phone market, we're looking in the same way at disrupting currency exchange. There are also other financial services that we can look at once we've been successful with currency exchange. But currency exchange in and of itself is a very large market and banks are completely unfairly profiting from this. They're offering this service that is very non-transparent to the user, and there's a lot we can do to make this more transparent and to give people better deals.

Have you had any reaction from within the banking industry?

Nothing that has reached our ears yet. But we do know that they are following and watching, worriedly, to see how far we can go. The banks do know what they're offering as currency exchanges is essentially a big rip-off, and if you were to dissect the profits that they're getting from currency exchange, they would see that it's a big part of it.

Interview: Cyrus Farivar

Editor: Sean Sinico

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