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Nov. 14, 2011, 12:01 a.m. EST
By Kim Hjelmgaard, MarketWatch
LONDON (MarketWatch) "” "A little informal exchange club" is how TransferWise co-founder Taavet Hinrikus describes the early days of the London-based money-changing start-up he co-founded in January.
Hinrikus, who, along with his business partner Kristo Kaarmann, is Estonian, moved to the U.K. about five years ago, and is an advocate for what he calls Consumer Finance 2.0, sometimes also referred to as Bank 2.0.
"Think of it as traditional consumer banking that is being ripped out and done by an outside player," said Hinrikus, one of the first employees of Internet-telephony firm Skype.
"When we had the first credit-card purchases on the Internet, for example, people were very suspicious of putting their card numbers into this thing called a browser," he said. "With TransferWise, which is about peer-to-peer currency exchange over the Internet, we are in a similar phase."
Broadly defined, Consumer Finance 2.0, as formulated by Hinrikus and others, is a growing category of financial service that is purely online, inclined toward collaboration, strives for transparency "” and may or may not be about to alter the financial-services universe.
In the current buzz-word parlance of technology start-ups from Los Angeles to Moscow, Consumer Finance 2.0 is "disruptive." It seeks to fill a consumer need, but, as a technology-driven enterprise, it's equally taken with the behavior-shifting possibilities afforded by innovation.
TransferWise, which Hinrikus and Kaarmann started while the former was still getting paid in Estonia but living in London and while the latter was continuing to pay rent on an apartment in the Baltic state, "disrupts." What's more, it developed out of its founders' specific domestic circumstances.
"We just hated the fact that every time we transferred money back to Estonia with one of the banks we were losing about 5% of the value of the transfer," said Hinrikus.
"If I transferred 1,000 pounds ($1,600) I would pay, for example, a £20 transaction fee to a bank, and then they would also charge me about 3.5% in the form of a completely hidden exchange rate."
Several of their Estonian, but London-living friends also faced similar, regular cross-border frustrations. "We just thought there's got to be a better way of doing this," said Hinrikus.
Here's what they came up with: If, for example, Kaarmann needed to send funds from London back home to pay his Estonian rent, while Hinrikus perhaps wanted to move money to the U.K. in order to draw on his Estonian-paid salary, Kaarmann would transfer a set amount from his London account to Hinrikus's London account. Hinrikus, in turn, would transfer funds from his bank in Estonia to Kaarmann's account in Estonia.
"We would then look at the mid-market exchange rate, which is available on Reuters, for instance, to determine a fair exchange rate," Hinrikus said.
And so one got paid, the other made rent "” and neither felt ripped off.
Today, the "little informal exchange club" has blossomed into a potentially market-changing proposition, with a monthly transaction volume approaching $1.6 million. In October, TransferWise grew 23% month over month, and it now has over 1,000 customers, many of them repeat.
Hinrikus said that TransferWise has saved its users approximately $400,000 since starting up close to a year ago.
Financial services are getting increasingly social. But do consumers really want to share financial information through Facebook "” and what are the risks? Stacey Delo reports from Finovate, where banking services meet technology.
The small print is straightforward. TransferWise charges a flat £1 fee for each transaction and vows to conduct the exchange at the best mid-market exchange rate it can arrange. This mid-market rate is essentially a wholesale rate instead of the various retail rates found at most banks, brokers, airport exchange booths and the like. Hinrikus said that they can't guarantee a specific rate, and that you get the mid-market exchange rate at the time the transaction goes through.
The service also requires its users to hold bank accounts in the territories that they want to exchange money in. So while the peer-to-peer element of the concept is arguably its most interesting, it's also its most restrictive.
Further, TransferWise is currently limited to transactions moving between euros and pounds, and this, along with the £2,000 limit per transfer available as of early November "” an amount since raised to £5,000 "” regionalizes the service, a point that Hinrikus also concedes. He said a dollar component to the website will be available next year.
"The larger point here is that most consumers simply don't know how much they are being ripped off by doing a currency transaction in the airport or by using a bank to make the transfer," Hinrikus said.
"If people want to do quite basic transactions this looks like a good service," said Paul Dimambro, of the British independent financial-services company Hargreaves Lansdown, which also operates a currency service. "The reality is that most banks charge very wide spreads," he said.
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