Currency exchange start-up TransferWise raises $1.3M

Crowdfunding company is already being called the “Skype of currency exchange”

Financial trends and news by Steven Loeb
April 17, 2012
Short URL: http://vator.tv/n/25ed

Updated to reflect comment from TransferWise

For anyone who has ever been traveling, you know how expensive it can be to exchange money into another currency. No matter what, you always come away feeling like you've just been ripped off.

That’s where start-up TransferWise comes in. The London-based start-up, which currently has accounts in 18 European countries including the UK, makes it easier, and cheaper, to send money between European and British accounts by essentially cutting out the banks and companies like Western Union, which normally charge fees and commission to transfer money.

It's an idea that already has more than a few VCs interested: the company just finished raising $1.3 million in seed funding from IA Ventures, Index Ventures and PayPal co-founder Max Levchin, French-based Kima Ventures, Seedcamp and The Accelerator Group.

The company was founded by executive chairman Taavet Hinrikus and CEO Kristo Käärmann in January 2011, while Hinrikus was working for Skype. 

The idea behind TransferWise came about while Hinrikus was being paid in euros, but was spending his money in London, where they still use the pound. Kaarmann, on the other hand, was being paid in pounds, but needed to pay his mortgage in euros. They set up a UK account and an account in Belgium, where Kaarmann lived. They each would put money into the other one’s account as needed. And that is where they got the idea to turn the money transfer into a business.

How the service works

TransferWise uses crowdfunding to get the money it needs to transfer into people’s accounts. This has led it to be known as the “Skype of currency exchange.”

Let's say someone wanted to pay bills in Italy but only had sterling. TransferWise would take the customer’s money and deposit it into TransferWise’s sterling account. It would then pay the customer’s bill in euros, using the money it had gotten from customers wanting to transfer their money the other way. TransferWise offers customers a way to get around paying wire fees and trumped up exchange rates.

TransferWise charges customers a small fee for small transfer, and a small percentage on large transfers, but their fees are minimal when compared with other companies. While the company currently only does exchanges between the Euro and the British Pound, Hinrikus told VatorNews will be adding more European currencies.

When asked about adding the US dollar, Hinrikus said it was "on the roadmap, but no timeframe to share yet."

TransferWise recently estimated what it would cost a customer if they were to transfer 1,000 pounds into an account in a euro country. With TransferWise they would only pay 4.5 pounds, a mere .45% in fees, and would wind up with 1,207.44 euros. If the customer were to make the same transfer using Western Union they would pay 112.19 pounds in fees, a charge of 11.22%, and would only have 1,085 euros in their new account. 

"We use the mid-market interbank rate. Thats the rate that big banks get on the interbank market," says Hinrikus. 

Hinrikus says he does not expect Western Union to react to TransferWire's model very quickly because "they are not a fast moving company as such."

TransferWire takes the money they save by avoiding wire fees and passes it onto their customer. Hinrikus said the company has saved clients 500,000 in bank fees as of February.

"We're doing to the money transfer market what EasyJet (or Southwest airlines) did to flying 20 years ago. We're replacing expensive international transfer with cheap local ones. Similar to what Skype did 10 years ago by making expensive international calls free of charge," Hinrikus said.

It is easy to see why many VCs see TransferWire as a company with a bright future.

 (Image source: girlsjustwannahavefunds.com)

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