A Look at TransferWise’s Model

TransferWise announced a $25M funding round last week, with investors including Richard Branson, Peter Thiel’s Valar Ventures, IA Ventures, and Index Ventures. The London-based startup aims to disrupt the remittance market by offering lower fees. They do this by operating a peer-to-peer (P2P) transfer model, where money destined for transfer does not actually leave each country unnecessarily (i.e. rearranging cash from other transactions in the same country). Software automation and the absence of physical branches also allow them to pass on cost-savings to the consumer. Consumers are also offered a mobile app (iOS and Android). Co-founder, Taavet Hinrikus, was the first employee at Skype.

The model makes sense, but an obvious problem is the imbalance of fund flows. This does not seem to be a major problem for TransferWise at the moment given their relatively low volumes (the company has processed $1.36B worth of transactions in total, in a market where $4T is processed daily). In an interview with Hinrikus, he talked about how there are always fund flows back to the country and they “just need to find the money flow” (source). A more pressing problem would be liquidity, given how TransferWise is essentially operating a marketplace. The company addresses this problem by tapping on the financial markets to buy missing currency.

Short-term marketplace liquidity issues aside, it would be interesting to see how sustainable the P2P model will be as TransferWise gets bigger and the effect of currency imbalance becomes more pronounced. TransferWise would have to resort to financial markets to fill the gap and lose the cost-advantage of the P2P model, or keep fund flows balanced but limit market growth. The latter option does not sound too bad considering how the pie for international money transfer is huge and there are existing inefficiencies in remittances that TransferWise could iron out. TransferWise could thrive in a way similar to Southwest Airlines — limited operations to a profitable sub-sector, competitive cost structure, and a superior user experience.