The London-based peer-to-peer money mover TransferWise Ltd. opened an office in New York this month, proclaiming plans to disrupt the U.S. market. But in reality, it could be more an ally than a threat to U.S. financial services companies.
TransferWise founders Taavet Hinrikus and Kristo Käärmann have likened themselves to the English folk hero Robin Hood, saving consumers from unjust and hidden transfer fees charged by banks. But there is a problem with the narrative of a disruptive fintech startup: It's not true.
The company's message is borne out by its research a mystery shopper exercise commissioned by the company found that the cost of sending $1000 from the US to Germany was on average $68 cheaper when using TransferWise versus 11 different US retail banks but this process is only possible because of the existing banking system.
Startups like TransferWise help banks by finding modern uses for their older infrastructure with a flexibility that banks typically don't have.
"The technology teams inside pretty much all the banks have realized that inventing the idea and making it happen inside the bank generally fails," said Nigel Verdon, partner at the fintech investment firm Orange Growth Capital. "Instead, they are very good at taking the idea from somewhere else and scaling it. What you see is them deploying some capital and giving [fintech startups] access to the problems that they're trying to solve with technology. They watch to see who are going to be the winners, then work with the guy and write a cheque to buy into that technology."
Publicists and media commentators have been keen to compare the recent batch of European fintech startups to the ride-sharing app Uber. Other companies in this category include WorldRemit, a London-based remittance startup which recently raised $100 million with the support of Technology Crossover Ventures; and the Funding Circle, a British peer-to-peer lender that last year snagged $65 million in a round which included Union Square Ventures and Ribbit Capital.
TransferWise recently completed a $58 million round of funding led by famed East Coast venture capital firm Andreessen Horowitz. Since its founding in 2011, TransferWise has processed roughly $4.5 billion through its platform and claims to have saved users around $200 million in bank transfers fees. But this antagonism is little more than a public relations exercise as newcomers are totally reliant on the banking infrastructure to scale their businesses.
Barclays bank is a prime example of how this dynamic works. Its fintech accelerator program in London offers dedicated technical support and banking expertise in an intensive three-month program for startups. This month, Barclays announced plans to bring the accelerator to New York, proclaiming its goal to "help innovators develop new disruptive fintech technologies".
When the mobile phone-based money transfer service M-Pesa rapidly gained market share in Kenya, Western Union reacted by partnering with the insurgent Vodafone-owned company. According to a number of experts, these alliances are driven by the huge regulatory burden posed by the patchwork of national and (in the U.S.) state-by-state rules for financial service companies.
Far from being the bane of bankers, red tape creates a huge barrier to entry for fintech startups trying to scale their businesses.
"When you're talking about a worldwide remittance business that you want to reach out and touch people, scale becomes extremely important," said Angela Angelovska-Wilson, a payments systems lawyer for Reed Smith. "One of the things that established companies have [seen] succeed is to build that scale and infrastructure. It's the economy of scale of understanding how regulations actually work in each country; it's the idiosyncrasies that matter. Both the banks and the startups need each other."
For TransferWise, the regulatory cost of setting up in the U.S. market could be as high as $3 million, according to Angelovska-Wilson. Each U.S. state has its own requirements to get a money transmitter licence as well as a tangle of other requirements covering consumer complaint policies and in-depth background checks for all executives associated with the applicant firm.
Even with the capital to pay legal fees, TransferWise still has to deal with a lumbering pace of government bureaucracy. Authorities in California have such a backlog of Bitcoin-related startups applying for licences that today firms face a 14-month wait just to have their case heard, Angelovska-Wilson said. TransferWise is still in the process of getting approved across the country, and in nine U.S. states it is working with PreCash to address its licensing needs.
"The marketing guys all love talking about disruption, but in private it's all about 'you've got to work with the banks'. TransferWise just gives better democratized access to the banking product; the winners at the end of this are the consumer and the banks," said Verdon.
Below: TransferWise employees promote their message by running nearly naked through the New York financial district in frigid weather.
TransferWise (@TransferWise) February 26, 2015