For TransferWise, founded by Estonians Kristo Käärmann and Taavet Hinrikus, 2015 was a busy year. And a very successful one. First, the company raised $58 million in an investment round led by Andreessen Horowitz, the best known venture capital company in the Silicon Valley, which increased the company’s value to $1 billion. At the end of 2015, Ernst&Young named the founders the UK Entrepreneurs of the Year.
Kristo Käärmann, Executive Founder of TransferWise, discusses what lies behind the meteoric rise of TransferWise, the company’s future plans and what can happen in the entire finance sector in the next five years.
TransferWise has become a unicorn, meaning that the value of the company is at least one billion dollars. What was your most optimistic vision when you started five years ago?
Our goals were certainly in a different dimension. We started with a very specific task – how to solve the problem of making international payments at a reasonable price. In the early days, Taavet and I solved the problem for ourselves – I transferred money to Taavet in one country and he transferred money to me in another country. That was the first phase. The second phase when we founded TransferWise was a kind of a test to see whether we could solve this issue for other people as well. Within the first six months to a year, we realised that indeed we could. Since then I think our main question has been whether 100 per cent of international transfers could move through something like TransferWise or would that percentage more realistically be 80, 20 or even just one. The truth lies somewhere in between.
One might say the more you eat, the hungrier you get?
Perhaps it is more accurate to say that when you are already doing something, you become more courageous. We are more and more convinced that our work is valuable.
You have recently said that after PayPal and before TransferWise nothing much happened in the field of financial technology (fintech). Why was there such a long period of silence? After all, there were ten years between PayPal and Transferwise.
That is a really good question. More in-depth analysis would take time but I think the problems [of the finance world] are not the easiest ones. When you have the technology – computers, internet, mobile phones – you can solve simpler things first and start with those. Finance is more complicated. And if you take healthcare, it is even more complicated.
What makes fintech so complicated?
In other fields solutions are in a sense more tangible and accessible faster. There is a lot of inertia built into financial services. In Estonia it is different, but there are very few people in Western Europe who have ever switched their bank account. You are virtually born into a particular bank and do everything the bank tells you to do. When you write your will, you give your account to your children or trustees and that’s it.
When will I be able to have a savings account with TransferWise?
We’re focused on international money transfer for now. Who knows what will happen in the future.
Lets come back to the timing of your idea. You obviously preceded the fintech trend.
In January 2011, when we blogged about TransferWise going live, it was the perfect timing. People were just beginning to trust online services. A couple of years earlier, it would have been much more difficult. Since then trust in online services has increased rather than decreased.
We have certainly ridden that wave of trust, comfort and acceptance. People are beginning to realise that they no longer need high street bank offices. Online services are just as safe as your brick and mortar alternative.
How often do you think that if you hadn’t set up TransferWise, someone else would have done something similar? If you had postponed it by even a couple of years, you would have missed the boat?
Then someone else would have had all the fun! I think a similar product would have been created for sure. It is difficult to evaluate whether it would have been equally successful as fast as TransferWise has. With hindsight it is emotionally more significant for me that we have in a sense achieved ‘nothing’.
This is because only zero point something of the world’s money transfers currently move via TransferWise. On the other hand, it is important that we have proved that this product is viable, it is successful and people need it. If TransferWise were to disappear tomorrow, we would still have created the innovation. The next player would come along, take our lessons learned on board and solve the problems of international payment further.
To what extent do you think you benefit from post-financial crisis movements like Occupy and the general scepticism towards banking? The fact that the financial world has the reputation of being unfriendly, inflexible, bureaucratic and greedy machinery?
The global financial crisis and the loss of trust in the banks probably accelerated the uptake of fintech – I have a good example to illustrate this. Three weeks ago I was in the USA and met with people who were both already using TransferWise and not yet using it. We found that there is much more blind trust in banks in the USA than for example in the UK. Four or five years ago there was a large payment protection insurance (PPI) scandal in England. It emerged that over ten years banks had been charging for an insurance product from all mortgage owners which in fact did not insure anything. It was a typical scam! They got caught out and the sum of money which they had robbed from people stretched into tens of billions of pounds. It was a huge scandal in the UK. The majority of people had bought this service and as a result distrust in banks skyrocketed.
Why has banking become so disreputable?
I can also ask why Volkswagen became a bad car producer. Great engineers made a great car but now they are bad polluters.
Is it just the money?
You could be forgiven for thinking so. It does happen in large corporations that people forget why they are working there in the first place. If you forget that you created a bank in order to provide loans to people and a place to keep their savings and to earn some interest, and you only worry about how to take more money away from your customers, then of course there will be people in banks who become greedy as you suggest.
I presume that you have to collaborate with the same ‘angry’ banks which are the target of your powerful advertising- and PR campaigns. What is their attitude towards you?
Very confident. We have about 50 banks all over the world who we work with on a daily basis. These are the banks who see that we do not directly compete with them in that field. They know that TransferWise works. They play along with us. Although our advertising may seem a bit aggressive, it is only aggressive about very specific things. I always try to say very clearly that banks in and of themselves are not bad. They experience hard times as everyone else does – there are always new capital regulations, disgruntled customers, 60-year-old infrastructure – you try work in these conditions! It is not easy to make it worthwhile to run a business.
What I am opposed to and ready to speak up against every minute and every hour is that banks have developed a habit of charging hidden fees. If you say that an international transfer costs €3 but then secretly take €300 more due to the exchange rate difference, then that is not fair. We are educated, we know how to do our maths and, if necessary, we calculate these hidden fees. Some people do not have the time or inclination to do that. But it is not nice to take away money from trusting people.
Reading your blog, one gets the impression that you don’t really trust banks. In a recent post you said that you just keep a very handy amount of money in the bank and, in an illustrative sense, are building your own personal one.
That is true but it is not only a question of trust. I do not believe that banks can really fail because governments will always bail them out. Rather the problem for me is that because governments are always ready to bail banks out, banks can afford to take risks for which they do not have to pay.
Therefore it is a matter of a philosophical lack of trust not just the practical lack of trust?
Yes that’s more the case. I do not see any value in letting a bank take a risk with my money, if I earn nothing from it. I would then rather invest in government bonds.
Is it true that you put a significant part of your savings into German bonds and P2P loans?
I don’t know if it is a significant sum, but yes I try to always save something.
Is it schizophrenia or risk management?
It is more of an experiment. To understand whether my life will be any worse off if I do not keep my money in a bank. Until then it hasn’t happened.
Lets talk also about TransferWise. You are in the middle of conquering the US market. How is it going?
It is actually going very well. I did say before that the US mindset is typically less suspicious, but they are still suspicious enough to understand how banks are robbing them. The US market is growing fast for us.
How easy or difficult it would have been for you to enter the US market without the investment and the name of Andreessen Horowitz? Traditionally it is not easy for European startups to enter the US market.
True. It is interesting that in the USA their banking habits are very different from those in Europe. My first biggest shock in going to work in England in 2007 and having my first contacts with a bank there was the thought that I have to go back home. I cannot do it, I do not understand how it works here! They barely had internet banking. In order to open a bank account, I had to go to an interview. In addition you had to go into a bank physically to do transactions, then you got a cheque-book. It all seemed like I’d gone back to the Middle Ages! It felt very Harry Potter-like in fact!
In time I discovered that although the beginning was very difficult, most things could be settled with a debit card. You do not make many bank transfers there, which is more common in Estonia. When we now went to the USA, the ways of moving money were again very different. Without a cheque-book it is impossible to rent an apartment. You have to write about five cheques a month, there is no way around that. If you now ask how our product would work in that environment… That is the biggest challenge.
How much money currently moves through TransferWise on the US market?
The total sum just recently came to a billion dollars. The growth has been very rapid.
How many other places you want to go to? You are in Europe, the USA and soon in Japan.
We want to be everywhere where people need to transfer money internationally. It will be very interesting to see how our product works in the wide world – Canada, the USA, Europe, Australia, Japan. Then the question becomes whether we just exist on the market or whether we become a mass solution.
Whereas your monthly growth at the moment is around 20 per cent, the real scaling should start when you have physically entered all markets?
Yes, of course. The latest report by McKinsey claimed that the service fees of banks on international payments are $300 billon a year. We calculate that we save $30 million of customer money each month. Quick maths says that our market share hence is 0.1 per cent or less. On one hand it is cool to know that thanks to TransferWise one million dollars are saved each day. On the other hand, we see the real potential.
How big is your real market share for example in England, where you have been for the longest time?
We can just have a guess, but our market share is becoming visible. It is no longer zero point something. There are four large banks in England who basically have divided the market between themselves. We are not currently on the same scale as any of those yet, but it is not a utopian dream that soon more international payments will move through TransferWise than all of those banks. That would be really great.
When that happens, how will you celebrate?
We will be immensely proud as it will mean that our customers would save a lot more money. Knowing the kind of people who we have brought together, we will probably not have much time to party. If we reach about 20 per cent of the market, we will automatically begin to think about the rest of the 80 per cent.
Business Insider recently pointed out that TransferWise is not profitable yet but you do not think that you need to rush to make a profit. How much time do you have?
A lot. It depends whether the investments we make are reasonable. As long as we invest wisely, we will have money. Today we can choose whether to be profitable or not.
If you wanted to, you could become profitable in an instant, but that would mean letting go of some ambitions?
Today we have made our choice and we plan to keep on investing.
Does that mean that the next round of investments is around the corner?
There will be a time for that. At the moment we like to invest and we plan to continue with that.
Recently many people from leading global companies have joined TransferWise. What arguments do you use to attract people from leading positions in Google or PayPal? What do you say to them?
It is not that complicated. Especially for people who work in big companies who are sometimes struggling to see any impact they are making. It is very difficult to translate what you are doing into any positive changes in the world. People who are mission-driven often struggle to see their impact in large organisations. Those who have joined us see that we have very clearly phrased the problem we are trying to solve. They see that they can do exactly that and understand how that one problem is solved in the world. Immediate impact is mostly what makes people decide. After all it is about making the world a better place. I don’t think we are utopian world fixers. We are just practical, rational people.
There is probably a long queue of engineers behind your door?
Certainly we have got people interested in working for us. We probably interview around ten engineers a day but that does not mean that we don’t have twenty available positions to be filled. So anybody who wants to have a go is welcome to get in touch with us.
When will TransferWise offer additional services on top of international transfers?
I have a very boring rational answer – when we see that it will enable us to achieve more. When the next ten people who we employ can accomplish more with a new banking product than with the one we already have. Today we know how to make payments cheaply, quickly and comfortably. Not a single bank today is able to move money from, say, England to France within 17 seconds as we do. Today it still makes sense to invest into the money transfer product.
But are you thinking of new things and services?
Certainly in the sense that we are looking into things which are wrong and which we could deliver much better than banks.
There is no point for us to create a product which is only somewhat better than the available standard. If we do something, the solution should be five times better. In the case of international transfers, we are eight to nine times better than banks when it comes to costs and five times better when it comes to speed.
How likely is it that in a few years’ time I will be able to keep my savings by TransferWise? That my salary would come to you?
Are you experiencing complications in Estonia with this?
Not on a practical level, but if I see that somewhere it is easier and more pleasant, then…
Most people are rational and act on their practical needs. Especially in this sense banks in Estonia range from good to excellent. I don’t want to make promises that we will do something. That is also why I don’t want to give a timeline. Perhaps we could think about what kind of banking problems we could fix. We don’t have to solve everything at once. Actually smaller problems are already dealt with. It is more interesting to ask when will the time come when you can manage your money without using a universal bank. That is where we could be in five or ten years. We will see what the role of TransferWise will be in this process.
How much do you pay attention to what is happening in the fintech sector?
I do pay attention to it a lot and I consider many founders to be among my friends. We talk to them and exchange experiences. For example about what they see on different markets whilst optimising card payments or providing loans. Each Friday we invite a guest speaker to the office; often it is another founder who is working on something cool.
The volume of investments into fintech sector has jumped from what seems like a zero to $14 billion in a couple of years. We could say that the fintech sector is booming, but how much room do you think there still is before reaching the ceiling?
If you take the 14 billion and compare it with the sum which banks have as shareholder value, you will see a crazy difference. In comparison to banking, fintech is still tiny.
So this $14 billion dollars in investments a year does not mean the market has become over-saturated?
I don’t think so. If we consider tech companies which deal with solving financial problems as part of fintech, then there are so many issues which haven’t been dealt with at all. If you consider house loans for example, there are not enough investments in this field. The same applies to insurance. I am not aware of a single pension fund startup. But they will come, for sure. Sometimes it is interesting to think how historians 20 years into the future will look back at our present day. Perhaps they will see it as the digitalisation period of the finance sector. It could happen in the way that companies like TransferWise appear and take bits away from banking. It could also be that some bank just solves the problem.
The interview was originally published in Life in Estonia.
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