TransferWise: ‘Two Estonian dudes’ take on the transfer market

“There were lots of unknowns when we started. Would anyone trust this website set up by two Estonian dudes? Would anyone else have this problem that we wanted to solve? And all these people around the world did have the same problem, and they did trust us.” - Kristo Käämann, BBC, January 2019 TransferWise’s latest fundraising puts it firmly among Europe’s fintech stars. As it turns out, those ‘Estonian dudes’ — Kristo Käämann and Taavet Hinrikus — are now trusted by over 4 million people to move the equivalent of over £3 billion a month across borders.

It has not been a conventional journey. At one point, the founders and employees were to be found running naked through London’s financial district in freezing February to draw attention to their ‘nothing to hide’ fees policy. The sauna in the office is also worthy of mention — and presumably helpful on the night in question.

However, it’s not just this millennial chutzpah that has set TransferWise apart but a unique corporate culture focused on experimentation and humility, learning from failure and constant reinvention. At one point, there was so much experimentation going on that when monthly volumes saw a jump, Kristo and Taavet couldn’t initially tell what had pushed it higher.

Nevertheless, its central mission has remained the same: moving money without borders: instant, convenient, transparent and, eventually, free. The customer is at the centre of everything: not only is this reflected in falling transfer fees but also in the ability of helpline staff to resolve problems and even sending chocolates to clients when they get it wrong.

It continues to fight against the bad habits of older rivals, such as banks and money exchanges. ‘Zero fee’ money transfers are nothing of the sort, they suggest, with companies making up the fees in poor exchange rates. The group continues to push for legislative changes in the UK and elsewhere. Regulators are slowly coming round to their way of thinking — recent regulatory changes in the EU and proposals in Australia are designed to force more transparency in foreign exchange fees.

A focus on transparency

Kristo and Taavet say they want their fees to be completely transparent, and as close to zero as possible. They point out that although their mission is long-term, the average price users pay on TransferWise continues to trend ownwards. In Q1, it dropped back to 0.63%.

It was the lack of transparency that motivated Kristo to launch the business in the first place. He received a £10,000 bonus in the course of his job as a management consultant. Keen to put it into his Estonian savings account (the interest rates were higher), he found the bank gave him a rate some 5% lower than the prevailing spot rate, plus a £15 fee for good measure. Kicking himself for being “incredibly stupid”, it ultimately led to the 2011 launch of TransferWise with Taavet.

The pair started to look for funding in early 2012 but initially struggled to find willing investors. They still bemoan the lack of a failure culture in Europe. In the US, they accept failure as part of business success but this is not the case in Europe and it holds businesses back, they believe. Eventually, having been turned down by 15+ European investors, they received capital from a small fund in New York called IA Ventures. A number of high-profile individuals also saw the potential, including Virgin boss Sir Richard Branson and PayPal co-founder Max Levchin.

Capital raising

This latest fundraising sees the pair selling around one-fifth of their holdings in the company. American growth funds Lead Edge Capital, Lone Pine Capital and Vitruvian Partners have bought in, while investors Baillie Gifford and Andreessen Horowitz increased their holdings. The pair were named as the two richest Estonians last year with combined wealth of almost €500 million, but that is certainly higher today. The company is now valued at $3.5 billion, double its level a year ago.

The group now has over 1,500 people across 12 offices and plans to hire 750 more in the next year. It currently supports 1,600 currency routes, and is available for 49 currencies. By its estimates, it saves customers £1 billion in bank fees. Last year, it made a net profit of £6.2 million on revenues of £117 million.

TransferWise attracts an almost religious devotion among its users. 5-star rated on Trustpilot, a recent Financial Times article drew the following comments:

"TransferWise is one of the few startups out there that does not have the 'growth at all costs' mentality. They actually care about their customers and solve a real problem [that they have] with a great service.”

“Great product, absolute pleasure to work with and customer service is top rate.”

“A fintech success story that actually lives up to the hype.”

The company holds this reputation sacred. It has a compliance team of 300 people taking care of antimoney laundering, verification, fraud and enhanced customer due diligence. It won’t offer transfers in companies where they can’t offer the requisite level of customer service or safety: “Sending money from India is one of our most requested routes, but it’s been hard to reach a user experience that we can be proud of.”

It has recently developed ‘smart verification’, using online checks to verify people’s identity instantly, rather than waiting up to two days for documents to be checked manually. The cost savings have been passed to clients.

Kristo and Taavet are clear that the recent fundraising allows them to expand and provide better customer experience, lower fees and faster speeds. Regulators are likely to prove supportive. The future looks bright for TransferWise.

DISCLAIMER
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.