When Ismail Ahmed moved to London’s outskirts in the late 1980s, sending money home to his family in Somaliland required a trip to a broker’s shop in the city, a 10 percent remittance fee, and anxiety over when the money would arrive. “I saw firsthand how costly and inconvenient it was for hardworking migrants,” says Ahmed, who worked his way to a Ph.D. and a job at the United Nations, where he advised companies on compliance with anti-money-laundering rules. In 2010, while earning an MBA, he cut out the middleman by becoming one himself.
Ahmed founded WorldRemit, one of dozens of startups running websites and apps that promise cheaper, easier ways to transfer money abroad. The World Bank estimates that remittance senders paid banks and courier services an average 8 percent of the $583 billion they sent across national borders last year. To send upwards of $1,000, WorldRemit and its digital competitors take 1.3 percent or less, says Daniel Webber, managing director of researcher FXcompared.com. “There’s definitely good money to be saved,” he says.
To keep costs low, the startups operate only digitally. They buy currency in bulk to take advantage of volume discounts and offer better exchange rates. Customers transfer money simply by registering and providing identification and payment details. To speed transactions—and maximize fee volume—most of the startups automate ID verification and check against money laundering, says Mike Laven, chief executive officer of Currency Cloud, which isn’t a remittance company but processes about $1 billion in monthly foreign exchange transactions for clients including banks and remittance providers.
$583 billion Value of remittances sent internationally last year, the World Bank estimates
WorldRemit and rival Azimo, both in London, pitch their services mainly to blue-collar migrants who regularly send money home to their families in increments of $1,000 or less. Another startup, CurrencyFair in Dublin, targets professionals who send larger amounts, $5,500 on average, to cover payments on college loans and mortgages. Yet another, TransferWise in London, says it averages $2,300 per customer transfer, although CEO Taavet Hinrikus says he’s trying to appeal to anyone “being screwed by the banks.” To further cut costs, CurrencyFair and TransferWise also operate peer-to-peer marketplaces that match people in different countries looking to exchange currencies.
Combined, the four startups will send about $10 billion to $16 billion across borders this year, Webber estimates. They’re concentrated in Europe because complying with regulations there is relatively cheap. Once licensed to move money in one European Union country, they can do so throughout the EU. “It’s much harder to build a business in the U.S.,” Laven says. “You have to go state by state to get licensed.”
Most of the transfer startups aren’t profitable, but investors say they’re more interested in the companies’ expanding market share. WorldRemit raised $100 million from investors in February, bringing its funding total to $147 million. Four-year-old TransferWise has raised about $91 million; three-year-old Azimo, $31 million, much of it in June; and five-year-old CurrencyFair, $16 million, mostly in April. In July, PayPal announced it was buying remittance company Xoom in San Francisco.
TransferWise, which attracted financing from Richard Branson and Vikram Pandit earlier this year, is capitalizing on a loss of trust in banks, says early investor Toby Coppel, co-founder and partner at Mosaic Ventures. “There is a huge amount of excitement,” says Dilip Ratha, head of the World Bank’s migration and remittances unit. “We are looking at a major force.”
The newcomers handle a sliver of the market compared with traditional providers such as Western Union, which alone moved about $85 billion in consumer remittances last year, charging a 5 percent fee on average. “While our senders say they are interested in considering digital, the majority of traditional users of our services still prefer cash,” says company spokeswoman Claire Treacy.
WorldRemit, which sends money from 50 countries, is licensed in 41 U.S. states and working on the rest. Brett Meyers, CEO of CurrencyFair, says his company will set up shop in the U.S., as well as Hong Kong and Singapore, next year. TransferWise will be in Canada and Japan in six months, says CEO Hinrikus. Azimo CEO Michael Kent says it’s hard to find a country where people aren’t looking for a cheaper remittance service. Says Kent: “The big guys have been ripping off taxi drivers, restaurant workers, and cleaning staff for far too long.”
The bottom line: Online remitters charge about 1 percent, compared with an average 8 percent for traditional services.