What’s with these Estonians, the young nation whose 1.3 million thrive off the Baltic Sea in Europe’s north?
Fifteen years ago, a bunch of Estonian developers came up with Skype, changing the face of communications and knocking one into the solar plexuses of telecom companies’ bottom lines. Acquired by eBay in 2005, Skype has come to rest in the hands of Microsoft, which paid US$8.5 billion (S$11.7 billion) for the company in 2011.
Last week, I sat down with another one of their tribe – Mr Kristo Kaarmann, the 38-year-old co-founder of TransferWise – who teamed up with Skype’s first employee, Mr Taavet Hinrikus, to start a fast-growing money transfer firm that has gained fame as a European unicorn, rare for its vintage and profitable as well.
Their story began when Mr Kaarmann, who had left PriceWaterhouseCoopers in Estonia to join Deloitte in London, asked HSBC to transfer £10,000 (S$18,000) to his savings account at home over the 2010 Christmas period.
When he checked his euro-denominated account in Tallinn, it appeared as though beyond the fee he had paid for the transfer, the equivalent of £500 was missing in his home account upon the money’s arrival as euros.
Puzzled, he made inquiries with both the sending and receiving banks. “I realised they were using the oldest trick in the book,” he says. “What HSBC didn’t tell me – and I failed to check at the time – was the exchange rate they used. When I compared their exchange rate with what Reuters or Google was telling me, there was a €500 difference. That’s as much as what I had been hoping to earn as savings interest. And I’d lost 5 per cent already, just on the transfer!”
Outraged, Mr Kaarmann turned to his friend, Mr Taavet, who had exactly the same issue in reverse. Paid by Skype in Estonia in euros though he had moved to London, he needed British currency for his living expenses. The two started an informal swap arrangement using the sterling-euro cross rate quoted by Reuters, where each would put equivalent amounts of money into the other’s local accounts.
In short, TransferWise had found a solution for cheap money transfers just as Skype found a way to make international calls without needing to pay hefty roaming charges to telcos.
“We beat the system, so that was very clever,” says Mr Kaarmann. “When we started looking into this, it was like every other bank in the world was doing the same thing – hiding different levels of margin in the exchange rate.”
The next month, the two launched TransferWise, seeking to put their model of money transfer to work. A blog posting on the influential technology site Tech Crunch was the launch pad for their website. It announced that two Estonians had built a site offering a cheaper way to transfer money from the UK to Europe.
It was launched as a service, he says, but guess what? In 15 minutes, there was a customer seeking to transfer £2,000. A few hours later, euros arrived in the TransferWise account for someone needing to send money to the UK. By the end of the day, the company had a book of business and money arriving in both accounts.
It says something about the culture of the Internet that anyone in January 2011 would have felt confident entrusting £2,000 to an untested portal. Looking at the T-shirt and shorts-clad Kaarmann, I can’t help thinking that the person sitting across me would have just entered his 30s at the time. Google was well known at the time, but not Airbnb. “I mean... we were both like... decent people,” he counters with a smile, before conceding that “people trusting a website built by these two Estonian dudes was new... and a little unexpected even”.
By the second day of business, TransferWise had a new problem: customers from around the world asking how they could transfer money to the United States, Singapore or Canada. In some ways, that has defined the firm’s twin challenges since: swiftly processing transactions as they come in and opening up new corridors of money.
THE CEO Mr Kristo Kaarmann is the co-founder and CEO of TransferWise. He is 38 years old. Prior to starting TransferWise, he was a management consultant with Deloitte Consulting and PricewaterhouseCoopers. He worked with European banks and insurers to modernise their processes and systems. In 2011, he teamed up with Mr Taavet Hinrikus, Skype’s first employee and then director of strategy, to develop an entirely new system for moving money across borders. Mr Kaarmann was named a Technology Pioneer of the World Economic Forum in 2015. Born in Estonia, he studied mathematics and computer science at the University of Tartu. He is married to Ms Kriss Soonik, an Estonian designer with an eponymous lingerie line targeting the Japanese market. The couple have no children. Mr Kaarmann likes to cycle, ski and do water sports in his spare time.
THE COMPANY TransferWise is a financial technology company that makes sending money overseas up to eight times cheaper than a bank. Founded in London in 2011, the company now moves £3 billion (S$5.4 billion) every month for its four million customers, saving them £75 million per month. It services 1,300 currency routes, connecting 49 currencies. TransferWise recently launched a borderless account – a multi-currency account that allows customers to hold and convert 40 currencies at the real exchange rate, and also provides local bank account details for Britain, the United States, Australia and Europe. It has over 1,200 employees in 11 global offices. Singapore is the firm’s Asia-Pacific head office. Valued at over £1 billion, which makes it a “unicorn”, TransferWise has raised £397 million in venture capital. Investors include Virgin Group founder Richard Branson and venture capital firms Andreessen Horowitz and IVP. The company has been profitable since last year.
The company now moves £3 billion every month for its 4 million customers, saving them £75 million per month. It services 1,300 currency routes, connecting 49 currencies, including the Singdollar. When I checked the site yesterday, TransferWise was offering to deliver £552.81 in London for every $1,000, with a $4.48 fee. In contrast, the best rate offered by a Singapore bank – per TransferWise’s published comparison – was the £547.40 offered by DBS, which was not charging a transfer fee. Other local banks offered significantly less competitive rates.
Recently, it launched what it calls a “borderless account” – a multi-currency account that allows customers to hold and convert 40 currencies at the real exchange rate, and also provides local bank account details for the UK, US, Australia and Europe. Singapore, where TransferWise employs 80 people, serves as headquarters for the Asia-Pacific region. It now moves $1.7 billion to and from the country on an annualised basis and business is doubling every year.
What’s more, TransferWise says it has been profitable from last year. Investors are taking notice: Its backers include the venture capital firm Andreessen Horowitz, Mr Peter Thiel’s Valar Ventures, Sir Richard Branson and former Citi chief executive Vikram Pandit. After five rounds of fund-raising, which brought in new investors such as Mitsui & Co, its value was put at about US$1.6 billion last year by some estimates.
Mr Kaarmann expects small and medium-sized businesses to provide the next engine of business growth. Small businesses particularly, he says, get poor treatment from the banks. While in some countries, the law regulates charges applied for personal banking, this doesn’t apply to business and institutional banking. For money transfers, small and medium-sized businesses get pretty much the same exchange rate as individuals do.
Sooner or later, chief financial officers and other managers who use the facility for their private transfers end up asking why not use it for their businesses as well. “So yeah, we see a lot of business volume as well. And especially in Asia, it’s quite meaningful.”
I wonder whether TransferWise would some day think of using the “float” – the time a currency rests in its books before the transfer is effected, to offer other financial services such as lending but Mr Kaarmann is clear that it will not. He does not see himself as an expert on mortgages and would rather stick to what he knows best: how to move money instantly.
“We define an instant payment to be a transfer that leaves your bank account in one country and arrives in another bank account in another country in less than 20 seconds,” he says. “We made 260,000 instant payments in September alone.”
He says governments seem to welcome TransferWise, partly because of the transparency of the operation and the easy availability of an electronic trail to every transaction that makes monitoring simpler. The firm has taken care to be licensed in every jurisdiction it operates, including all 50 US states.
Technology and artificial intelligence are shaving not only speed but also the fees charged by institutions, and Mr Kaarmann expects his own field to be no different. Indeed, he thinks the cost of money transfers could drop to zero, or close. After all, he says, the cost of moving money is really the cost of moving information and the security around it. Just as the marginal cost of sending an e-mail is infinitesimal, so too would be the cost of moving funds. The pie is large: Research indicates that global banks are making about US$200 billion a year by feeding off exchange rate margins. Besides, if TransferWise could cut the rates and yet be profitable and find money to grow, surely the model is an effective one. “So, we have started disrupting ourselves,” he says. “We cut our fees. We are in the very early beginnings of a very large problem that needs a solution.”
Singapore is set to see a doubling of TransferWise’s staffing as the firm uses it as a hub for the Asia-Pacific, including creating niche products for the region. Offices in Australia and Tampa, Florida, help it maintain a follow-the-sun approach. Interestingly, some banks have come forward offering to work with TransferWise, in some cases even hosting its account on their apps for bank customers to access.
Every new parent wakes up in the middle of the night to peer into the baby’s crib to check he is breathing. What is Mr Kaarmann’s worst nightmare, where TransferWise is concerned? “Two years ago, we assessed that we’d proved our solution works,” he says.
“If TransferWise ceases to exist today, someone else would pick it up and finish it. We’ve shone enough light in the shadow that the banks are doing.”