If you live in a big city in America or Europe (or the Persian Gulf), chances are you've seen immigrants lining up at neighborhood stores to send money back home to Mexico or India or the Philippines. But unless you have personal experience in this little corner of the global money market, the chances are even greater that you aren't aware of how big a deal these electronic transfers have become—or that the (usually poor) customers are usually ripped off in the process. Hence the potential importance of an Internet startup called Transferwise, which has the promise of making a ton of money, even as it transforms the business of transferring small amounts of cash across borders for very small fees.
First, a little background. The last time the World Bank counted them up, immigrants' remittances to developing countries were approaching $400 billion annually—almost four times the sums sent home in 2002. The biggest recipients: India and China, followed (distantly) by Mexico, the Philippines, Egypt, Pakistan, Bangladesh, and Nigeria. These numbers are small compared to, say, GDP. But they add up to triple the total non military foreign aid handed out around the globe, and they are critical to the survival of hundreds of thousands of small business start ups that are the best hope for development in some of the poorest places on the planet.
That's the good news. The worm in the apple is that the transfer fees are generally akin to those charged by pawn shops and payday-loan mills. For example, HSBC charges $30 to send $200 from the United States to China, while Credit Agricole charges $36 to send the same amount from France to the Ivory Coast. On average, transfer fees run to 9 percent of the sums transferred.
In part, the high costs are driven by the relatively small average size of the transfers involved and by the regulatory hassles on the receiving end; fees look far more reasonable for transfers in five figures. But a lot of the problem is lack of competition in the places where poor people—and poor immigrants, in particular—purchase the services.
The World Bank is working hard to make this market more transparent, regularly publishing the fee schedules of dozens of financial institutions serving 219 country-to-country corridors. And the Bank make no bones about why: Even modest cuts in average fees would means billions of dollars more for developing countries, at no cost to taxpayers and with little chance of misappropriation by corrupt officials. But it is plainly an uphill struggle to get the attention of immigrants who often lack the time, aplomb and language skills to shop around.
Enter the British-based Internet start up, Transferwise. The company's business plan is simple: Use an online network to match people anonymously who want to send money from A to B with folks who want to send money from B to A, in much the same way electronic securities exchanges anonymously match buyers and sellers. Transferwise takes a modest fee (£1 for up to £300) in return for the combination of the matching service and the financial intermediation service that eliminates the need to trust the counterparty.
The company is just two years old and, as The Economist points out, has almost exclusively been serving Europeans. Whether it can become a force in the vast business of immigrant remittances remains to be seen.
Once concern is that the exchange will be used to fund terrorism, in much the way hawala networks of money brokers in southern Asia and the Mideast have sometimes been used in the past. But this seems a red herring since online transaction are easier (if not really easy) to track than the back-of-the-souk transactions currently facilitated by halawa brokers.
The bigger potential problem is the potential for chronic directional mismatches in the volume of traffic: Every dollar sent from, say America to Nigeria must be offset by a dollar sent in the other direction. Foreign exchange brokers manage this with multi-currency clearing—and, in theory so could a company like Transferwise. Let's hope that, one way or another, it can give the traditional conduits of remittances a run for the business.