What's the first thing that comes to mind when someone mentions "remittance"? Expatriates sending money home. Second? Lousy exchange rates.
While exorbitant currency spreads and hefty bank charges are the norm for payments that cross national borders, the impression that they mostly affect individuals is wrong. Annual people-to-people transactions amount to $400 billion a year. People-to-business payments – like sending fees to schools overseas – come to another $1.5 trillion. Those are substantial figures, but they pale before the $124 trillion of business-to-business transfers, according to McKinsey & Co.
A large multinational may be able to squeeze a saving from its corporate bank, but SMEs and individuals get routinely shortchanged. The challenge is acute in Asia, where money transfer costs are three-fifths higher than in Europe or the US Capital controls and fragmented domestic banking industries breed inefficiency, which helps banks garner $85 billion in annual revenue – $38 billion more than what they make from cross-border transfers in North America. That hurts the competitiveness of smaller Asian firms.
On their own, banks would have done nothing to alter the status quo. But a rising challenge from fintech means better rates are coming to Asia, and not a day too soon. The export-led region is deeply enmeshed in global supply chains. (The disruption caused by the China-US trade war has demonstrated that amply.) Many of the small and midsize firms that move anywhere between $11 trillion and $15 trillion internationally are in Asia. To that add digital consumption, which is growing everywhere but exploding in the region. Finally, every small saving on Western Union transfers by Indian, Bangladeshi and Filipino overseas workers gives them more ability to consume other things.
All this makes it crucial that clients in Asia – both individuals and small firms – get fair prices. But what's fair? Zero, or a number very close to it, Harsh Sinha, the London-based chief technology officer at TransferWise Ltd, tells me. Currently, the global average for the payment industry ranges between $25 and $35. When the lender receiving customers' funds needs a correspondent bank in another part of the world to complete the transaction, costs pile up.
Something as innocuous as buying a cup of coffee with a Hong Kong credit card in Bangkok is punished for making unforeseen demands on local banking liquidity.
TransferWise, an eight-year-old startup that's now valued at $3.5 billion, came into being when its two Estonian-born co-founders, Taavet Hinrikus and Kristo Kaarmann, stumbled upon a solution: If one of them had pounds and needed kroons, the Estonian currency, and the other had the opposite need, they could be of mutual help. Since two flows can't be perfectly matched, TransferWise uses algorithms to predict which country will need liquidity, when, and top up the bucket accordingly with its own funds. Customers get mid-market exchange rates – and not the vastly different "we buy at/we sell at" prices displayed by money-changers. TransferWise says it's up to eight times cheaper than banks.
Challenger banks reckon that fintech can help them shake the dominance of entrenched rivals. Sinha says TransferWise is open to bundling its money transfer service with another bank's app, something it has done with Monzo in the UK, and Bunq in the Netherlands. Now's the time for such partnerships in Asia. As many as eight virtual banks will be arriving soon in Hong Kong. Singapore may license up to five. Taiwan has approved three. More are coming.
Traditional banks must raise their game to keep customers from fleeing to the likes of TransferWise and Revolut Ltd, which are held up by researcher Oliver Wyman as examples of fintech specialists "capturing share from banks and driving down margins." HSBC Holdings Plc, which together with a subsidiary has a lock on 30% of Hong Kong's deposits, started offering a "first ever" 12-currency debit card to its top-end customers last month. That still doesn't match the 40-currency card that TransferWise is bringing to Singapore, its Asia-Pacific headquarters, later this year, though it does take care of the paying-for-coffee problem in Bangkok.
TransferWise is already profitable and confident that as volumes grow from 4 billion pounds ($4.9 billion) a month, its costs per transaction will go down. Still, it did raise some fees last year for US customers after conceding its previous charges were unsustainable. But banks can't be smug. The revolution that apps like WeChat Pay and Alipay ushered in for domestic payments in China has caught on. As local-currency payments in Asia become instantaneous, cashless and cheap, customers will demand similar features when they remit funds overseas.
After all, it's not like an intermediary needs to move a sackful of dollars anywhere. As Sinha says, it's just data hopping from one computer to another. Why should it cost $25?