Low cost foreign currency exchange comes to Japan

Taavet Hinrikus, CEO at TransferWise

Taavet Hinrikus, CEO at TransferWise

Peer-to-Peer foreign currency exchange TransferWise is rolling out in Japan in September. The firm, which recently became a $1.1bn ‘unicorn’, aims to reduce the cost, time and effort to move money internationally. CEO and co-founder Taavet Hinrikus told Beacon Reports his plans to champion low cost money transfer.

Hinrikus first became aware of how banks gouge customers on foreign currency transfers, after moving from Estonia to London in 2007 for his then employer, Skype. Still on an Estonian payroll, he regularly transferred funds to London. Not only did transfers take forever, but less arrived than was expected. “That’s when I learned about the hidden fees on exchange,” he says. Banks are notorious for disguising the real costs, typically 2% – 5% on amounts transferred.

Frustrated, Hinrikus approached Kristo Käärmann, an Estonian friend living in London who had the reverse problem. Käärmann regularly transferred funds from London to Estonia. The two teamed up to cut out the banks, knowing that local transfers are fast and free.

Instead of wiring money abroad, Hinrikus instructed his Estonian bankers to make a domestic euro transfer to Käärmann’s Estonian account. Similarly, Käärmann directed his London bankers to make a local pound sterling transfer to Hinrikus’s UK account. They calculated how much to send by looking up the mid-market exchange rate on the Internet. “We quickly realized that we were saving a lot of money and we had this great feeling of having outsmarted our banks,” recalls Hinrikus.

Thinking there were many people with a similar problem, the pair started TransferWise in early 2011. They aim to level the playing field, charging up to 8 times less than banks — for example .5%, on amounts transferred, when exchanging pound sterling to euro.

The firm retains banking partners in each country, for instance Bank of Tokyo-Mitsubishi UFJ in Japan, to make local bank transfers. They also rely on third-party financial institutions to trade currency, when a matching counterparty cannot quickly be found. Reports suggest this happens often.

TransferWise converts £500m monthly — only a tiny slice of the global foreign exchange market. The cost of maintaining market liquidity may be contributing to depressed profits. The firm lost £11.4m on £9.7m in revenues for the year ended 31 March, 2015.

Hinrikus must capture global market share if the firm is to become profitable. As Skype’s first hire, he helped drive the cost of international phone calls way down. He may well do the same for international money transfers. TransferWise has received $117m of investment for that purpose to date. Investors include Andreessen Horowitz, Peter Thiel (through Valar Ventures) and Sir Richard Branson. The firm employs over 600 staff in Europe, the US, Canada and Australia. “We are just beginning our global expansion,” Hinrikus says, adding, “We have another 50 countries to tackle.”

From September, Japan residents can look forward to cut-cost international transfers to and from 50 destination countries on amounts up to ¥1m (the maximum currently allowed. In Europe the maximum is £1m). Expect to pay 1% on conversion of yen to pounds sterling, euro and US dollars and 1.5% on conversion to other currencies.

TransferWise is regulated by the Kanto Local Finance Bureau. Our own trial money transfer went through without a hitch. Given the yen’s strength, there may never be a better opportunity to repatriate funds.

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