We had the pleasure of speaking with Marc Rubinstein, author of Net Interest, a financial sector newsletter, about his essay, Money Without Borders: A Peek Inside Wise.

Marc writes:

Two forces have shaped the economy over the past several decades: technology and globalisation. While fintech is usually a play on the former, Wise (formerly known as Transferwise) is a product of them both.

The company was founded in 2010 by two friends, Taavet Hinrikus and Kristo Käärmann. As origin stories go, theirs is well-rehearsed. The pair are originally from Estonia but met while working in London. Taavet had moved to the UK in 2006 in his role as director of strategy for Skype but continued to get paid in Estonian kroon. Kristo, a consultant at Deloitte, was paid in pounds, but needed Estonian kroon to make mortgage payments back home.

As anyone who’s tried will know, using the banking system to move money across borders can be a cumbersome process. Banks evolved to satisfy a mostly domestic customer base. A network of correspondent banks exists to facilitate cross-border payments but the number of intermediaries involved makes it slow and expensive.

Taavet and Kristo designed a simple alternative. Once a month they’d look up the GBP/EEK cross-rate on Reuters. Taavet would then transfer kroon to Kristo’s bank account in Estonia and Kristo would pay Taavet back in pounds. Both got the currency they needed at the prevailing rate without incurring any charges.

They soon realised that they were not the only two professionals in London with this problem. In 2010, there were nearly 4.5 million non-British nationals living in the UK, corresponding to around 8% of the population. The reverse numbers were also very high. Taavet had seen at Skype how a peer-to-peer system could disrupt telecommunications. With Kristo’s banking industry experience they resolved to do the same with currency exchange.

The two founders got regulatory approval and launched Transferwise at the beginning of 2011. Their timing was very good. Consumer groups were increasingly pushing back at the high level of fees UK consumers were paying for foreign currency. A complaint was lodged with the Office of Fair Trading about fees – estimated at £1 billion annually – as well as the lack of price transparency offered by the currency exchange services.

In its early days, Transferwise marketed itself as a ‘peer-to-peer currency exchange’. Customers were told they could exchange currency with peers at mid-market rates, with Transferwise acting as a trusted third party. Initially, fees were fixed at £1 per transaction. The first currency pair the company supported was GBP/EUR. (Estonia joined the Eurozone at the beginning of 2011, so the founders could still use their platform to send money back home.)

Within five months of launch, the platform had done £1 million of volume and in its first year, it did €10 million. Taavet and Kristo raised $1.3 million of seed funding to take them through 2012. Their plans were to develop a scalable customer acquisition strategy, expand the range of currencies and increase revenue per payment. The pitch deck they used is fun to look back on.

Read on or listen to our conversation (recorded on June 21, 2021):

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This conversation is available as an episode of Gain Industry Insights, a member podcast of MOI Global. (Learn how to access member podcasts.)

About This Audio Series:

MOI Global is delighted to engage in illuminating conversations on the financial sector with Marc Rubinstein, whose Net Interest newsletter we have found to be truly exceptional. Our goal is to bring you Marc’s insights into financial services businesses and trends on a regular basis, with Marc’s weekly essays serving as inspiration for our discussions.

About Marc Rubinstein:

Marc is a fellow MOI Global member, managing partner of Fordington Advisors, and author of Net Interest. He is a former analyst and hedge fund manager, most recently at Lansdowne Partners, with more than 25 years of experience in the financial sector. Marc is based in London.

About Net Interest:

Net Interest, authored by Marc Rubinstein, is a newsletter of insight and analysis from the world of finance. Enjoyed by the most senior executives and smartest investors in the industry, it casts light on this important sector in an easy-to-read style. Each post explores a theme trending in the sector. Between fintech, economics and investment cycles—there’s always something to talk about!

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