Converting currency is almost like going to the casino. You’re probably going to lose money one way or another. Luckily, a Fintech company called TransferWise aims to not always let the house win by cutting banks out of the process.
Using the service on a browser or app (iOS and Android), people can receive money in dozens of currencies and convert it at the mid-market rate.
Trading in currency
TransferWise’s two co-founders, Kristo Käärman and Taavet Hinrikus, were from Estonia but worked abroad in London, so were forced to convert currency often to pay bills both locally and back home. They exchanged funds with each other in Euros and pounds at the mid-market rate to avoid going through banks. It was this bespoke solution that triggered the service’s inception.
Fast-forward from 2010 to today, and the company has 1,200 employees across nine global offices, with $4 billion circulating every month. It estimates that it saves users up to $1 billion every year. Best of all, it’s free to join and set up an account, where sending and receiving money feels like a cross between PayPal and a traditional bank.
TransferWise charges both a percentage and flat fee for each transaction, but the amounts are a fraction of what financial institutions, or even PayPal, would charge for currency exchange. PayPal slaps on a 2.5 percent flat fee, but also marks up the exchange rate, whereas banks almost entirely hide their fees by shaving off points from the mid-market rate to their advantage.
As an example, if you wanted to convert $2,000 to Euros via TransferWise instead of a bank, you would save over $100. In that scenario, TransferWise’s fee would only be $12. Compared to Western Union, this route would put an extra €140 in your pocket. It’s only slightly cheaper than WorldRemit, where there’s a €13 difference.
All of this can be done through the website or the app, though you do have to get money into your TransferWise account. Acting as a virtual brokerage, there are account numbers for the most widely circulated currencies, like the U.S., U.K., Eurozone and Australia. For instance, you could get paid in U.S. dollars while working in Canada and have direct deposit to your borderless account.
From there, you can convert what you want on the app to Canadian dollars and transfer it to a Canadian bank account or just pay local bills directly from there. Even though the greenback has the rate advantage, you could still stretch each dollar further by avoiding the bank’s margins.
All told, one could hold or convert funds in up to 44 different currencies, with countries as varied as Switzerland, Egypt, Japan, Brazil, Turkey, Singapore and New Zealand among those listed. The list is actually shorter — about 21 countries — for exchanging money, whereas you can receive the converted funds in any of the 44. There’s no integration with cryptocurrency, as of this report, so exchanging for bitcoin isn’t an option here.
To add more flexibility in sending, receiving, and transferring funds, the company launched what it calls a “borderless account” last year. It allows users to hold multiple currencies at once, including account and routing numbers to accept direct deposits and wire transfers for the four jurisdictions noted earlier.
It’s not exactly like being a currency trader, but it sure can feel like it. It also feels like having a bank account in each place. For example, a Canadian freelancing in the U.S., but living in Australia, could get paid in U.S. dollars as if he or she had a bank account there. Direct deposit works the same as any other bank, only there’s no currency exchange taking place. In other words, there’s no need to accept a costlier wire transfer in American funds to a Canadian or Australian bank at their rates.
PayPal charges a 2.9 percent fee plus an additional $0.30 per transaction when receiving money from a merchant. If you have multiple transactions coming in each month and over the course of a year, that spread starts to pile up. While PayPal would allow users to receive money in any supported currency, you can’t transfer it to a bank without converting it first.
TransferWise tries to cover both ends. On the one hand, you receive money in the currency you want, and don’t pay extra for it. On the other, you convert it to the currency you need at a mid-market rate with a much smaller fee tacked on. Direct deposit and transfer within the app also negates having to go with wire transfers under the archaic SWIFT system, which incur their own fee and take longer to clear.
We tested this out on a number of occasions to gauge how it works, and found it to be pretty quick and seamless. There were some caveats we picked up on, though.
First, with a USD account at a foreign bank, we could only deposit dollars into it via wire transfer, incurring the very same bank fee we would’ve wanted to avoid. That wasn’t the case at all with an account in the U.S., where funds transferred much faster. Second, while you could transfer foreign currencies intact from PayPal to a borderless account, it’s a one-way street. Once that cash is out of your PayPal account, there’s no way to put it back in.
Third, we wouldn’t have been able to pay off a foreign credit card using the same currency from our borderless account. We’d have to deposit funds into a bank account first before doing that. And lastly, we found no success in using a borderless account as a backup on PayPal to make online purchases when we had zero balance in PayPal.
TransferWise recently issued a debit Mastercard in the U.K. and Europe that acts like a credit card at point-of-sale (or online) and a debit card at an ATM. The card still isn’t available in the U.S., but could be launched stateside before the end of the year, though no date has been confirmed.
PayPal has a similar Mastercard in the U.S., except we found a big difference between them, especially for traveling.
PayPal requires that you change your primary currency before you use the card to buy anything or withdraw cash specifically with the local currency. For example, if you hold U.S. dollars, Australian dollars and Euros in your account, and are going to Spain, you would need to switch your primary to Euros, so that whatever you use comes out of that balance first.
TransferWise’s card pulls out local currency first, and then defaults to whichever other currency you have that offers the best conversion rate. Using the card at a point-of-sale terminal presents the option for local currency. Selecting it will always pull money out of the corresponding currency from the borderless account based on where you are. We haven’t seen that with PayPal’s card yet.
There are limits to note, however. While there’s no annual fee to have the card, cash withdrawals are only free up to £200 or €200 per month for the British and European cards, respectively. TransferWise tacks on a 2 per cent fee after that. PayPal’s card was only limited to $400 per day, but you couldn’t go past it. There were also no fees to withdraw other than those of the ATM itself.
That does make TransferWise’s card harder to appreciate when repeatedly pulling out cash during your travels. Especially when the company’s fee is on top of whatever the ATM is charging. Granted, they have no control over that, but it’s a hard pill to swallow when withdrawing an extra €200 comes with a €4 charge, plus whatever other extortionate fee the ATM chews up. Do that several times, and it adds up.
On the other hand, the fee does come out cheaper than if you were to exchange money as you went along. Exchange rates can fluctuate slightly day-to-day, but the markup is always the same, be it at the airport, a bank or one of those currency kiosks. It only takes minutes to convert through the app, which is instant, as there’s no delay to process the transaction before pulling the money out.
Security and regulation
Despite supporting payments to online merchants, TransferWise’s card doesn’t support Mastercard SecureCode, an additional security layer that provides a private PIN code that only the user and financial institution know. The PIN is hidden to others, including online merchants. If an online vendor requires it to facilitate a credit card payment, this card won’t be of much help.
The company’s overall security came into question when its entire service suffered an outage in June. The explanation outlined technical issues rather than hacking as the culprit in the paralysis, but users weren’t shy in voicing their displeasure on social media.
The shadow of potential money laundering also naturally comes up. Not to mention speculative currency trading where users exchange funds consistently on a daily basis to earn more. TransferWise reps told Digital Trends that both of those scenarios are constantly scrutinized in the form of alerts they can act on to snuff them out.
On the regulatory side, the full information details the partnerships and registrations the company has locked up in the U.S. These include the Financial Crimes Enforcement Network (FinCEN), Community Federal Savings Bank, Cross River Bank and Wells Fargo. Those banks are covered by the Federal Deposit Insurance Corporation (FDIC), which means balances up to $250,000 held with TransferWise are insured in case the company goes under.
Not that this is related directly to regulation or security, but we should note that TransferWise’s card isn’t part of any rewards programs. So if you’re into collecting frequent flyer points on your purchases, you won’t be getting any while whipping out this card.
Paying it forward or back
For those who send remittances to relatives or friends living abroad, this service does simplify the process. Within minutes on your phone, you’re done. Even in cases where you could be visiting them, sending the money beforehand in the local currency means they can withdraw it for you upon arrival — again, with less to pay upfront to do it.
Traditional banking, especially when it comes to money transfers and foreign exchange, doesn’t make it easy or fast to pull these things off. TransferWise appears to be on the right track, though with competitors, like Revolut, emerging, a currency trade war of sorts may be afoot.
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