He was the first employee at Skype – and Taavet Hinrikus believes his current project, TransferWise, can have a similar sort of impact on the world stage in disrupting the global financial system. In doing so, he believes many banks will find themselves out of business. Bold assertions, certainly, but in PayPal founder Peter Thiel and Index Ventures, the London-based startup has secured some heavyweight support.
TransferWise is a money transfer platform with P2P-esque qualities – if you send funds abroad via a bank, it costs you time and money, whereas TransferWise rearranges cash from other transactions in the same country. Users input a recipient’s account details or email address, and then a payment is taken from their debit card.
It’s a clever system in a space which is crying out to be forcefully disrupted and which, the company says, is ten times cheaper than transferring money through a bank. But are claims of global potential just pipe dreams? With Germany one of TranfserWise’s main focuses, Silicon Allee sat down with Hinrikus to talk about the future of banking.
SILICON ALLEE: How did the idea for TransferWise come about?
TAAVET HINRIKUS: I was the first employee at Skype and spent a long time building it up. At one point I moved to London but was still being paid from Estonia. So every month, I had to go to the bank in person to make an international transfer. It took four or fives days to receive the money in London, which was kind of annoying. But even more annoying was the fact that I received much less money than I thought I would. So for example, if I was sending €1,000 and I went and looked at the exchange rate in the Financial Times I would think I was getting £800, but in fact I would get £750 in my account. Some of the money goes missing along the way. It’s like serving me food and taking a bite out of it.
That’s where my frustration came from. Then I met Kristo [Käärmann] who became my co-founder, another Estonian who was living in London. He was getting paid locally, but he had to send some money to Estonia to pay for a mortgage. We started talking and realised that we could help each other. So the next month, I transferred some money from my account in Estonia to his account in Estonia, and he transferred some money from his account in London to my account in London. It was much faster, and pretty soon we had saved thousands of pounds. Then we started thinking that there are a lot of people who either live, work or study abroad, a lot of people who have the same need who have become frustrated with their banks and its what gave us the kick to start building TransferWise.
SA: What advantages does it have over using a bank?
TH: We are doing it in a peer-to-peer fashion, collaborative consumption. We are utilising the customer funds we have to do it faster and cheaper. Think about it: there are a bunch of people sending money from Berlin to London, and a bunch of people sending money from London to Berlin. The money we get in London, we don’t send it to Berlin but pay it out to people who send money to London. The money never has to leave the country.
Second, we are a very streamlined online company. We don’t have branches, we don’t have old mainframes to support.
And there’s one more thing – we’re not greedy. The way your bank thinks about it is, how much can we charge and get away with it? We’re thinking the opposite, we’re thinking that this is a commodity service. Sending money abroad should be easy. How little can we charge to build a global sustainable company?
SA: What are the most common usecases? Expats sending money home?
TH: Yes, but there are also those with a second home, sending money to parents, paying back loans, a morgate or student loans, or having a salary paid in a different currency. If you’re a small to medium business with suppliers or customers abroad, then there is also a lot you can do with TransferWise.
SA: How is TransferWise a similar experience to that you had at Skype?
TH: Skype made the world smaller by letting people communicate globally very cheaply or for free. And the next logical step is letting people send money across the world in a very easy way. It shouldn’t cost you an arm and a leg, for example, to send money to your family in India.
SA: What happens if there is a significant imbalance in the flow of funds between two countries or currency areas? For example, is there a lot of money going from the UK to India but not the other way round?
TH: There is always money coming form India to UK as well; there are big corporates buying things form the UK etc. The money flow exists, we just need to find the money flow.
SA: But how would you solve such an imbalance in the short term?
TH: We have set up relationships with the financial markets so that if we need to, we can go and buy the missing currency. Otherwise we would have to start turning away customers. But that is something which is done completely automatically; the customer doesn’t know it’s happening.
SA: What do the banks think about all this?
TH: Today, I think the banks are still living in their bubble. They think that there is nothing anybody can do to affect them. Similar to when we launched Skype, and a year later there is quite a famous quote from a high-up AT&T executive who said this Skype thing will never work and nobody really wants to use it. Well guess what? Ten years on and 40 percent of international calls are done on Skype. AT&T and Skype are equals now; ten years ago AT&T was laughing at Skype. The same is happening now with banks and TransferWise. Banks are looking at this little company from Estonia, nobody really cares about it, but we’re growing 20 percent on a monthly basis and pretty soon we will be in a position where the banks will be worried. But there’s nothing they can do.
SA: Over the past ten or 15 years, most industries have been disrupted. Finance is one of the few where that process has not happened. Why not?
TH: Trust. People used to trust banks with their money. However, what we have seen in the last five years is that trust in banks is at an all-time low. On the other side, people are going to banks and saying I want you to be cheaper, faster and more transparent; I want you to be like my Skype, I want you to be like my Spotify. Trust used to protect banks. The result is a perfect storm scenario. And there are a dozen different verticals where you can see startups like TransferWise which are innovative: money transfer, lending, credit cards, crowdfunding and so on. New entrants which are not banks are winning market share.
SA: There are plenty of competitors already – CurrencyFair, Azimo…
TH: Our competition is really the banks. These new entrants should not worry about fighting each other; the real fight is against the Goliaths. We are looking to create a new category and to be a very significant player in that, and if I look now at what we have achieved in these three short years, I think we are well on the way to getting there.
SA: Give us some numbers.
TH: We launched in 2011, and by October last year €300 million had been transferred, saving about €15m in bank fees. We have 70 employees and 30 open positions.
SA: What are your user numbers like?
SA: Given that the Germans are traditional more cautious with their money, that’s a bit of a surprise.
TH: I totally agree that based on our feedback and on research, Germans are much more conservative with money. I was quite surprised to learn that people often to to their bank to ask for advice about money. But at the same time, Germans are really smart and can see that if there is a way to get such large savings, it is worth looking into.
SA: Seeing as we’re sitting here in Berlin, what are your thoughts on what’s happening in the city?
TH: It’s very exciting. I very strongly believe that you need an ecosystem to succeed, you need to have a group of similarly minded-people together so you can hire people, you need to have an ecosystem around lawyers, designers, suppliers. Berlin is one of the few places in Europe where it is happening. It’s really good to see that a core group of successful global companies like SoundCloud, 6Wunderkinder and ResearchGate being started and growing in Berlin.
SA: What did you learn from working at Skype that you have applied to TransferWise?
TH: What I really learned at Skype was how you go about building a global company. How you build your team, your structures, your processes, how you think about expansion. This gives us a really big advantage compared to everyone else out there as we have a really solid team who has done this before. None of this is real rocket science, but it takes time to get it right. And we have really solid experience from building a globally successful company before so I think we can do things much faster thanks to that.
SA: What are your top tips for any entrepreneurs out there?
TH: The first tip is to get started. That’s what most people fail with, they talk about their ideas for ever and say I would like to do this, but they keep on working at their jobs. The second one is to listen to your customers. We have a culture of everyone doing customer support, everyone answering support emails and calls because we think it’s important for everyone to be in touch with what our users are thinking and doing.
SA: What will the banking system look like in five or ten years?
TH: We wil be definitely be doing most of our banking on these little things [referring to mobile devices], whatever they look like. We’re not going to be going to a bank branch to do simple things like money transfer or taking out a loan. Similar to what we have seen with Skype, we will see that 30 to 40 percent of banking will be done by new entrants. It will be startups like TransferWise and probably some of the current online giants will enter the different banking services. We will see a bunch of current banks go out of business because they can’t adjust, and we will see some of them become very good at it. But we will be reaching a level playing field like what is happening now between AT&T and Skype, for example.
SA: Can you be as big as Skype?
SA: Bigger than Skype? Really?
TH: Hell yeah. It is really important to think about how we an build this to be a global financial services company How can we really define the relationships people have with their money, how can we make things radically simple and different.