Kristo Kaarmann, co-founder and chief executive officer of TransferWise, a UK-based peer-to-peer money transfer service company, shares his entrepreneurial vision in establishing the company, its business model, and how it works to achieve zero fees.
Here is the transcript:
Emmanuel Daniel (ED): Kristo Kaarmann, co-founder and CEO of TransferWise, one of the biggest companies today growing very quickly, is reinventing how we think of cross border payments, in general. Kristo, tells us the story. You and your partner are both in London trying to solve this very simple problem of remittances to Estonia.
Kristo Kaarmann (KK): Yes. Exactly. So, when I moved to London about ten years ago, I had a very nice problem in my hands. I had too much salary. I started working at Deloitte, at the time, and the Christmas bonus came in. I had nowhere to put the money. So I decided I’m going to put it in my savings account and earn maybe it was like 1 percent a year on this. But when I went to HSBC, then, I just made an international payment to Estonian bank account. But what I found was that about €500 missing somewhere on the way. So, I contacted HSBC and asked if there was a mistake or something. And I never realised that, actually, that happens on every single cross border transfer where the bank just uses a pretty random exchange rate.
Well, very sort of random, it’s the real exchange rate that you see in Reuter’s, plus then, another 5% to double that. So, that’s how banks make money on international payments. And what we find is that then, I don’t really quite like this, so I had a friend, at the time, who was living in London as I was. But his salary was, instead of euros, he was paid by Skype in Estonia.
And what he started doing was, whenever I needed to send money to Estonia, I looked at the real exchange rate, put the amount of pounds that we agreed into his account in the UK, so just made UK to UK transfer, and then, according to the exchange rate, calculated how many euros would he need to move from his account in Estonia to my account in Estonia. So, actually, we never moved the money across borders but made a paid transaction among ourselves.
ED: And was this Taavet?
KK: Yes. He’s my co-founder, Taavet. And since then, that was just a solution for us. And it ran smoothly with friends. Whenever we needed to do the other side, we would call upthe group. But then, in 2011, we figured it’s not our problem alone. It’s a global problem. You can use it to send money to the UK or to the US. And 15 minutes later, someone put £2,000.00 on our account to send to France. And then, later, some people in Europe put money in the euro account to send to England. And we had –
ED: A problem in your hands because you now needed to find liquidity on the other side.
KK: Well, the liquidity was provided by our users because we were just really matching them and not moving it across borders.
ED: And it was that easy. Like your system wasn’t robust yet, and the security?
KK: The security, everything was there. It was just really very simple. It was very robust but also very simple. And, of course, we got licenced before we started. And we just had so much demand. And people were writing to us saying “hey, I was a student, and I was doing this crazy scheme in Canada buying stuff on the US Exchange” and then, selling it on the Canadian Exchange just to get their currencyso, we saw it as so much –
ED: Different uses not just remittance. But all kinds of things that people use it for, right?
ED: So, you were able to create those two communities. Now, the interesting thing is about anyone who does anything to do with transactions on the web, especially if it’s supply chain related, you have to fake it at first. They have to show that their transaction is taking place. You didn’t need to do that.
KK: Not really. We just had it on the first day.
ED: Because it’s money.
KK: We had it on the first day. People trust us on the first day. And there’s just so much demand. I think it was just driven by demand. So, next week, people are asking can I send money to the US. Can I send money from Canada? Can I send money to Singapore? And you know the rest of the story for seven years has been just adding more countries and working on the demand.
ED: But, at the same time, there are number of Estonians, Kazakh, and former Eastern Europeans living in London today trying to set up businesses of the same sort that you seem to have been able to scale. So, why were you able to scale, and so many of the others sort of never seemed to take off the ground? Maybe there corridor is smaller, the technology is not well thought through?
KK: Almost every corridor in every currency is big enough. The corridors are big. It’s just the question is I think we have, over time, figured really out what users want. And they want three simple things. They want the money to get their fast. They want transparency. They want to know exactly how much they’re paying. They don’t want to have a random exchange rate. We were the only ones, and still are, and very few ones who are pioneers in this, so money always exchanges at the same exchange rate that you see on Reuter’s, always. And we charge a very transparent fee. And this is what users really, really appreciate.
So, now that you can move money nearly instantly, you can see what you’re paying for, and it’s not much.
ED: And there were the incumbents, at that time. There were the Moneygrams of the world. There was Worldpay and all of the others. So, what was your proposition, in a crowded marketplace?
KK: I do think, in retrospect, it was really transparency was the biggest proposition. And, of course, we were cheaper than anyone else. And quite soon, we were faster than anyone else as well. But I think what real differentiator, from the beginning, has been transparency. So, the fact that –
ED: Transparency of the exchange rate?
ED: And the fees, right?
KK: So, you really know exactly how much you’re paying. And you start trusting the product because you know that they’re not trying to rip you off.
ED: Okay. And that’s for remittances. What about payments? Like if you take an average credit card payment, and today, the credit card companies tell you, if you want to pay in the local currency or the currency where you’re trading at, or your home currency, and they give you a rate. And then, if you Google the rate, you realise that there is that same difference, in a way. That’s payments. How are payments different from remittance that way? Do you see yourself, eventually, going into payments, so that you are a replacement to Visa and Mastercard?
KK: That’s a very good question. So, let’s just put some context around this. So, first of all, payments compared to remittance, as you call it, is quite small like cross border element. Payments is huge on its own, but the cross-border payments are not that big as cross border money movement when we think of import and export that needs to happen on trading. But, of course, our users get the same frustration when the dynamic currency conversion shows up on the POS terminal. And they’re super frustrated. So, what we were about to launch in Europe and rolling out in the rest of the world is a borderless account.
An account that holds 28 different currencies. You get local account numbers in US, UK, and –
ED: That sounds suspiciously crypto.
KK: It has nothing to do with crypto. It’s completely normal currencies that we’re used to. So, that borderless account –
ED: But it’s your token. It’s a token.
KK: As much as a token as an HSBC account is an HSBC token.
ED: But it’s multicurrency token.
KK: No, it’s not multicurrency token. There are actual currencies. So, it can hold US dollars.
ED: I see. You can hold multiple currencies. That’s what you’re saying.
ED: Okay. We haven’t tokenised it yet.
KK: And the beauty of it is, for businesses, so if you’re a business in Singapore, you can get this borderless account, and you get local account numbers in the US, in UK, in Australia, in Germany, so that, when you charge your customers in the US, you put US account number on your invoice. And you receive dollars directly into the borderless account.
ED: So, do you then set up a nostro account in the US? This is a personalised nostro account, which is –
ED: Okay. And you’re willing to do that for the customer.
KK: It’s five clicks away from anyone who wants to do it. Go through the QAC process, and then, they get local accounts anywhere in the world. And this is live. We have an amazing demand for it.
ED: Live between?
KK: It’s live in most countries in the world. And these accounts, at the moment, are in Euro zone, UK, Australia, and the US. We’re adding more to that. We’re adding more to that. But you can even use it in Singapore. Then, when the money arrives in the US accounts, it shows up as US dollars in your multicurrency account. We don’t charge anything for that. And it’s up to you. If you have bills or suppliers in the US, you can pay biller right away. If you need Singaporean dollars to pay salaries, you just convert it into dollars here and pay salaries from that account.
ED: And have it transferred into a local bank in Singapore.
KK: You can do that as well.
ED: And all of that process is free.
KK: All of that process is free. And on the conversion, we use the Reuter’s exchange rate and charge the same fee as we would do in the transfer.
Tranferswise’s business model and competitive advantage
ED: And so, what’s the business model in the back of it? It’s like where do you make your revenue? Is it like the volume?
KK: There is volume, and that is what matters. So, what we find is we can lower our fees gradually as we grow volume. And we’ve been profitable for a year already. So, there are enough fees because even if fees are tiny, there’s so much more that we can cover.
ED: If it was that easy, if the transparency was all it was about, why aren’t the others doing it? Why is it not – the critical success factor is like anyone in remittance just needs to be transparent?
KK: I think it is, actually. I think it is.
ED: So, you have a lead time or a window of opportunity that’s going to close on you very quickly because the others will figure it out as well. And you now have scale. And your investors like you because?
KK: Because we’re doing really well.
ED: That includes some very interesting people. You’ve got Richard Branson, Peter Thiel, people with no payments, with no disruption and stuff like that. What are your investors’ biggest worries when they think about where you’re taking this?
KK: So, they know that the opportunity that we’re looking at is enormous. But they also know that we’ve got a strategy that is very independent, as we’re already profitable. We can grow and actually reduce our prices as we grow. So, we just did that in Singapore last year. We did that today in Japan where we dropped our prices by about 30% on those rates. And we can keep doing that because it’s just a scale. It’s just a lot of scale. As long as you do the right thing for the user, you will get more scale.
ED: Okay. At the moment, it’s small value. What is the predicate item that you generally transmit? And is that getting bigger? At which point will you become small business, and at which point will you become corporate?
KK: We have small businesses and corporates using TransferWise. It’s happening. Even from the early days on, do payroll in like 27 different currencies. People have connected through the API. There are banks using TransferWise. So, we were moving £1.5 billion per month already. And this is only getting bigger. There are people who buy expensive properties for millions of dollars in one transaction.
I think anything that you would use your bank for, you know for a fact that the bank lets you down on foreign exchange. You can just use TransferWise.
ED: I guess, if the first critical specific is transparency, the second is actually liquidity on either side. It’s not even the technology. You haven’t arrived at the technology yet. So, somehow, you seem to have created liquidity on multiple currencies. Were some countries easier than others? Were some currencies easier than others and some currencies that you wouldn’t touch because it’s too difficult?
KK: That’s a very good question. And you’re right to put it this way. What the bankers found. It’s very interesting. There are studies that show the most expensive currencies to use are the ones that are closed or managed by the Central Bank or the government. And so, let me actually give you an example. We were offering transfers to Nigeria in Naira. And about a year and a half ago or two years ago, we actually closed down that route because we saw that there was a real banking system with Central Bank established exchange rates, fixed exchange rates. And then, there was, actually, a shadow company because we were a legit business.
We can’t really be involved in it. Everyone else in Nigeria was involved in the shadow exchange business. So, then, we just moved out of Nigeria overall because we don’t want to be using the real system as the cost was like 20%– the price there was 20% of – but then, over time, the Nigerian Central Bank also got on top of their game and opened up the currency slowly, so that we actually entered the market again about three months ago. And it’s done amazingly without any complications.
ED: So, between you and Taavet, which one is the currency expert? Or which one has the instinct for FX?
KK: Well, neither of us, actually, because we really don’t take positions in FX. We don’t use it as training.
ED: You don’t touch that at all.
KK: Exactly. We don’t want to carry FX risk. And we don’t want our users to carry FX risk. And we don’t really support any type of currency speculation. That’s not our goal. The goal is to make it really cheap and easy for people who want to move currency across borders.
ED: And as you build the rails, there’s a temptation to add a lot more technology around it, right? There’s crypto. There’s blockchain, stuff like that. Do those things interest you, at this time? Or is it distractions?
KK: It definitely interests me intellectually. And I’ve spent quite a bit of time playing with, and developing myself, so I can build stuff on crypto. But we haven’t really found anything for our users that would make use. So, it doesn’t really help things go faster or cheaper than we can already do it.
ED: Because Ripple will tell you that – well, if you have crypto then, you won’t have to worry about this liquidity on either side. They will solve that problem for you. And it’s just adding another intermediary in the process.
ED: Do the banks talk to you? Do they come after your floats?
KK: Absolutely. The banks love us. Some banks have gotten really smart. So, I was just telling the story on the stage about this happened about three years ago, there’s a small currency called Forint in Hungary. And there are loads of customers coming to use TransferWise in Hungary. And we asked them how you heard about us. And they said our bank has suggested using TransferWise. I’m really surprised about that because, usually, we point out all of the flaws that banks have in foreign currency. And then, we learn there’s a small bank in Hungary who realised every time they do a cross border transfer with a user, it’s a terrible experience and actually very costly for themselves.
So, it made so much more sense for them to train their front office staff in branches that when someone walks in who wants to send money to the US or to the UK, they would teach them how to set up a TransferWise account on their own and fund it and make the transfer happen this way. So, we didn’t know about this. And that’s how they just get all of their users to use TransferWise.
ED: But then, the banks will start saying, at this point, KYC comes in, there’s an issue of how robust is KYC. And if you did create connectivity, there are issues there. And then, the compliance cost goes up. Has that been creeping up at all?
KK: Not really because that’s also a matter of scale. We have pretty enormous compliance operations.
ED: How many people do you have so far?
KK: We’re over 900 people in nine countries. There are a lot of people behind this operation. And a lot of sophistication goes into both transaction monitoring.
ED: Then, you don’t have anybody left for development work.
KK: We’ll have plenty left for development work as well, as you see, we’re adding more currencies. This is what we do.
ED: No, I guess what I’m trying to suggest is how do you keep your organisation small enough to ace the game? And yet, you need to have more and more people because of the operational costs.
KK: Absolutely. And I think the way that it works is you will always need to do a few things manually, when it comes to transaction monitoring with our clients. Then again, a lot of those things you can do really smart, and you can build algorithms that do part of the work for you, whether it’s relying on machine learning.
ED: Is that what you’re doing?
ED: Are you keeping your compliance costs down by using machine learning.
KK: A lot of that is just doing things sort of smarter than a lot of others who set this up in like 20 or 30 years ago.
ED: But why aren’t the Moneygrams of the world doing automated KYC, for example? If you go to pay average remittance company, in most countries; firstly, they need you to show up. Yours is probably done online. And secondly, the documentation required and stuff like that, and all of that process. Many still operate that way. How are you able to convince regulators to accept your algorithms and the way in which you see compliance?
KK: The regulators are seeing that the way we do these things are, actually, working better than putting armies of people on the same task. So, regulators, they watch closely how we do these things, and they come and audit us every now and then. We’ve had a lot of audits in just the last year. So, this is very normal for us. We’re now licensed in 42 countries around the world. So, we have to please the Japanese regulators at the same time as the Ohio regulators in the US. So, I think, when you ask about remittance, you also should appreciate that their business is very different. They’re dealing with cash.
Cash that is harder to track. Cash that you actually do need to deliver somewhere physically. And I think that, as long as it’s needed, and it’s going to be needed for a little while, especially in more developing countries, it’s a hard business and actually very frustrating. So, I completely understand why Western Union and Money Gram have to charge the margins that they charge.
ED: At the same time, they’re looking at you saying, hey, if only we did what you’re doing, we’ll look like a much more customer friendly business. So, it’s a matter of time before the differences start getting –
KK: I guess so. But I think that’s more of the question of how long do people use cash and whether we see more developing economies moving to maybe bypassing bank accounts, in the traditional sense, and moving to ATM or moving to M-PESA or some of these digital wallets where the life becomes limited and more digital. And then, also cheaper for people when they want to move money.
ED: Right. So, do you have conversations with M-PESA?
KK: We’re using M-PESA. So, if you send money to Kenya –
It goes straight into an M-PESA account.
ED: Right. And so, your account agnostic doesn’t have to be a bank account. It can be M-PESA account?
KK: Absolutely. We don’t know what is the difference between a bank and an M-PESA account. Both hold money. So, we can deliver it to those, and we would.
ED: Which countries are you doing cards and why?
KK: We use cards wherever appropriate. It will often, especially for smaller transactions of like two thousand euros or pounds, people will use credit cards or mostly debit cards actually in Europe to fund the transfers. And what that does is actually beautiful. So, if you’re a user in Poland or Italy, and you’re sending money to the UK, and you’re funding by card, it’s quite likely that your payment will arrive in 20 seconds into some bank account where you need it.
ED: And that’s because of EU regulations, right? And then, there’s no fee element as well. And that’s regulated.
KK: It’s not so much about the regulation, but just the speed of the networks that we can achieve with cards. And in the UK, there’s a master payment system that we directly connected to. So, that makes things really, really fast an experience for someone who moves money from one country to another and sees that happening in 20 seconds, it’s amazing.
ED: But the banks on either side put a fee on that transaction. So, the cost becomes a little higher?
KK: You’re right. So, debit card still carries some interchange that is expensive for the users. And that’s why users don’t tend to use it for large amounts but for smaller amounts that the fee is not that high. And it’s only 0.2% in Europe.
ED: Tell me a bit more about Mission Zero.
KK: Exciting. Mission Zero is our way to talk about why we’re doing what we’re doing. So, going back to the story I told you how Taavet and I got start with it, we thought it was kind of outrageous that, for something as simple as moving like email from one country to another, it’s not really much more complicated than moving an email from Singapore to Singapore, moving it from Singapore to Hong Kong. So, why was that not the same with money that, whenever money is transported, it becomes prohibitively expensive?
And it becomes really slow. So, the origin of the Mission Zero is that we should be able to move money nearly at zero cost between any two countries and currencies and nearly in no time and at no cost.
ED: And what makes you get there? What do you need, as a supporting philosophy, to reach that? Because number one, minimise the intermediaries.
ED: Is that what it is?
KK: I thought you had more than number one.
ED: Well, I can imagine two or three, but you’re the man doing it.
KK: So, you’re right. Any intermediaries in the process, they’re likely to slow it down. Actually, that’s more important and charges a fee when they’re doing it. And the question is can we replace these intermediaries with technology and the software is eating the world, and it’s definitely eating the banking industry. If you can replace things with software, then, at scale, it becomes really, really cost efficient. And moving money really is moving information.
And the idea that you can replace people and intermediaries with software will, eventually, drive the cost down and the speed.
ED: But when it comes to FX and money, there’s this whole cartel that runs the wholesale side. And they’ll be looking very seriously at someone like you and saying at which point we put a stop to this guy. When will you become wholesale?
KK: When you say cartel, who do you have in mind?
ED: Well, the 60 banks that sit on the FX rate Worldwide basically.
KK: Well, sure, but they trade with each other the same way as they trade with us. They just happen to be market makers on the foreign exchange.
ED: There’s no reason why a small bank in Indonesia, for example, shouldn’t use you to move their money.
KK: And they’re starting to do that. So, I don’t know if you’re familiar. In Europe, there’s a bank, No. 26. It’s similar to the story I told about Hungary. When they started out, they had a choice. Of course, the users would need to send money not just to Germany but outside of Germany. And they had a choice of integrating standard SWIFT and integratebanking network or integrate TransferWise. And guess who they picked?
And they would be crazy to integrate SWIFT in this day and age if you’re just starting up. So, surely, they integrated TransferWise now. It’s really a beautiful experience, actually, because, when you’re inside the app, you connect to the TransferWise app and the No. 26 app, and then, you can create the transfer on the No. 26 app in their bank account. And it will appear in TransferWise as well. So, it doesn’t really matter where you use that service from or what’s your UI or your channel. It just appears in TransferWise in the process as a normal TransferWise transaction.
ED: But to get to point zero, what has to happen in technology? What are you looking for, in terms of a breakthrough?
KK: I think more so than technology, the technology is kind of getting there. And it’s more, I would say, the local infrastructures need to be improving, in terms of moving money between banks and other players. So, we have this great story in the UK where we built a batch system, got replaced with what’s called master payments. And that means that any money movement between banks and us is instantaneous 24/7. And now, we’re seeing other parts of the world. So, Australia is launching MPP is their version of that. Singapore is quite advanced, actually, in this sense. US is quite behind.
So, we see that a lot of work needs to still happen in parts of the world to get a local infrastructure in place. And then, it’s really important when that happens, and I think UK government and regulators learned that lesson really well, to open that infrastructure up not just to the big banks but to others who are bringing the customer benefit from making those immediate connections at a really low rate.
ED: Is there temptation to provide that kind of service where local banking system is really back, and something that TransferWise can work domestically? Or are you very focused on cross border?
KK: We’re really focused on cross border. We see that this is an enormous problem to solve. And we’re just in the beginning of it. We’re moving like $1.5 billion a month is just being in the very beginning of it.
ED: Kristo, it’s been lovely speaking to you. And to just understand that it’s such a simple story. It’s, in itself, legendary actually. So, what you’re doing is amazing. Actually, one more question. Competitors?
KK: I wish we had more. I wish we had more. I think banks have had this market for a long time. And they haven’t really treated their users transparently. So, the more we have transparent competition, and I would love if someone is able to do some of this much better than we do, we would recommend them wholeheartedly because I think users deserve to have the best option available.
ED: This is a continuing conversation. Thank you very much.
KK: Thank you very much.