TransferWise is the first nonbank to become a member of the U.K.’s Faster Payments service (FPS), but with Brexit on the horizon, it has to make sure it is similarly invested in other markets.
Since TransferWise is based in London, its success has so far been defined by the city's ability to attract talent. Brexit could limit the talent pool, but in the process it would also necessitate outreach to other regions to reassess TransferWise's position with regulators.
“Brexit could have two impacts on us,” says Steve Naude , head of Middle East/Africa at TransferWise. “The first is access to talent, since our global HQ is in London. There’s a fantastic fintech scene in the U.K., and our London office has many people from all around Europe."
The other potential impact from Brexit could be on TransferWise’s e-money license. “We’re regulated in Europe by passporting our UK e-money issuer license,” says Naude. “It’s not clear what will happen post-Brexit, as to whether we’ll need to get licenses across Europe.”
Naude was part of the team that worked on TransferWise’s FPS integration. Within the U.K., access to FPS via a settlement account with the Bank of England gives TransferWise a way to cut costs while speeding up transfers.
In July 2017, the U.K.’s central bank extended direct access to its Real-Time Gross Settlement System (RTGS) to nonbank payment service providers (PSPs) to encourage financial innovation. The move means nonbanks can access U.K. payment systems that settle in central bank money, including FPS, the LINK ATM network, Visa, and the new digital cheque imaging system. The FPS was launched in 2008 to enable real-time transfers for small-value payments.
Meanwhile, TransferWise is building its presence beyond Europe by opening regional offices.
“Our largest corridor is between the U.K. and Europe, but we’re seeing fantastic growth in Asia, where we just opened our Singapore hub office,” says Naude. “We’re growing rapidly in the U.S., and have offices in New York and Tampa. We don’t operate in too many Middle East countries yet, but we’re looking into expansion there, as the number of requests from our customers to send money to and from the UAE, for example increases every month.”
Last year, TransferWise introduced multicountry “borderless accounts” with associated debit cards to make it easier for businesses, gig economy contractors, and individuals to be paid in different countries. “The borderless accounts are offered in partnership with regulated local banks, and the funds are securely segregated from our own funds at our partner banks,” says Naude.
“Our goal is that you’ll be able to hold borderless accounts with local sort code [routing number] and checking account number in different countries, and make transfers and spend money and receive money like a local in an individual country via your borderless account,” Naude says.
As TransferWise is a direct FPS member, when someone outside the U.K. funds their TransferWise borderless account via bank transfer or debit/credit card, the money can be transferred into a U.K. bank account instantly.
“We’re passing on our reduced processing costs to our clients and giving them real-time transfers when sending money into and out of the U.K.,” Naude says. “Because of our growth in scale over the last few years and also through connecting directly to the FPS, our cost per transaction is now 50 times cheaper than when we launched in 2012.”
TransferWise involves a same-currency netting process based on peer-to-peer transfers and real-world exchange rates. If a consumer or business wants to convert pounds to euros, for example, TransferWise’s system locates a sender in the same country wanting to convert euros to pounds. It automatically matches the currency flows at the real midmarket exchange rate and pays the recipient from TransferWise’s local euro or pound bank account, so the money never moves cross-border.
While this model works well in developed markets like the U.K. and Europe, some receiving markets like the Philippines have a net inflow of funds.
“Where it’s possible to net same-currency flows off, we do so,” says Naude. “In our major currencies, pounds, euros, and U.S. dollars, we net the majority of funds and pass the savings onto our customers. Where there is an imbalance between in- and outflows, we trade on the currency markets. But we trade in bulk at a fraction of cost compared to private individuals.”
The vast majority of TransferTo’s business is bank account-to-bank account transfers, and it accepts credit/debit card-based transfers. It also supports mobile wallets such as M-Pesa.
TransferWise is authorized as an Electronic Money Institution (EMI) by the U.K. Financial Conduct Authority (FCA), which means its license is “passported” across the European Economic Area (EEA). In the U.S., TransferWise is registered as a money service business with the Financial Crimes Enforcement Network, and is licensed as a money transmitter in every U.S. state except Hawaii.
“In order to access a settlement account at the Bank of England and become a direct member of FPS, we had to undergo additional regulatory oversight and controls,” says Naude. “Other potential FPS direct members will need to undergo these additional controls and scrutiny. This involves really strict requirements on safeguarding segregation of client funds to ensure proper protection of their money and to reduce systemic risk. In addition, the U.K.’s regulators have strict controls for FPS direct members concerning AML/KYC.”
Following its move in the U.K., TransferWise wants to persuade regulators and central banks in other countries to let it participate directly in their forthcoming Faster Payments systems.
“We’re sharing our U.K. learnings with other regulators and central banks such as the Federal Reserve,” says Naude. “We encourage central banks to offer direct access to their real-time payments to nonbanks.”