Anyone who has ever struggled with the bureaucracy associated with opening an overseas bank account might welcome a new service from British financial technology company Transferwise.
Launched in January, the company’s ‘borderless’ account – coupled with a debit card – allows users to hold up to twenty-eight currencies. Once signed up, account holders can carry out transactions in a currency of their choice as they travel around the world. In a statement accompanying the launch, Transferwise co-founder and chairman Taavet Hinrikus claimed the borderless account was a “game changer” for anyone living or working between countries. “Opening a bank account abroad is incredibly difficult without a local proof of address,” he added. “But a borderless account can be opened in minutes.”
Initially available to just 1,000 consumers ahead of a progressive rollout through 2018, the Transferwise account probably won’t be for everyone. We’ve all become used to the idea that everyday debit and credit cards can be used, fairly seamlessly, in shops, restaurants and cash machines in most countries. It’s equally simple to buy goods and services from an overseas website using a UK card. Thus, a multi-currency facility isn’t necessary for the majority of transactions.
But using a single currency account exposes the users to ups and downs of international currency markets, once exchange rates are factored into a transaction. That may not be much of a problem when goods are bought or cash is withdrawn, over the space of a two week holiday, when the chances are that any change in the relative value of the currencies in question will be small. But for those frequent travellers or companies that regularly do business overseas, sharp currency movements can cause real financial pain over the long term. It’s a pain that can be avoided if transactions are carried out in the local currency.
So, Transferwise is targeting some very specific customer groups. “For expats, second homeowners, freelancers and more, the borderless account is invaluable,” Hinrikus said.
A Competitive Market
The Transferwise solution is not the only game in town. Multiple currency accounts have been available from traditional banks for many years, but in the view of Hinrikus, most have charged prohibitive fees. “For the first time we’re bringing true multi-country banking – with real bank details in key currencies – to anyone who needs it,” he argued.
But there are other new players in the market. For instance, Revolut – which styles itself as a digital banking alternative, offers a prepaid debit card that allows users to hold up to sixteen currencies. Again, transactions can be carried out in the currency of choice.
Meanwhile, WorldFirst – a foreign exchange broker serving companies and relatively wealthy individuals – last year announced that it was launching a World Account, Aimed at SMEs, the new account offers the ability to open local bank accounts overseas and hold dollars, sterling and euros.
To Illustrate the potential demand for its service, Worldfirst cited research suggesting that small and medium-sized companies were carrying out foreign-exchange trades to a value of £76bn every month.
Transferwise and Revolut – founded in 2011 and 2015 are relative newcomers to the banking and payment services marketplace and both have succeeded in gaining significant traction with consumers and business customers. For instance, according to Transferwise figures, around two million people and organisations use the company’s platform to move an average of £1.5bn every month. Meanwhile, Revolut announced in November 2018 that it had signed up its one-millionth customer. Both companies have attracted significant VC funding.
Money Pouring In
The ability to attract investment reflects a growing interest in the UK’s burgeoning financial technology (fintech) sector. According to figures released by London and Partners – the agency mandated to promote business in the capital – tech startups in the UK attracted investment of £2.99bn across the whole of 2017, twice the amount recorded in the previous year. Within that total, the fintech businesses secured backing to the tune of £1.34bn.
Transferwise was among the leading beneficiaries of venture capital largesse, bagging £211m in 2017, but there were other big deals, including investments of £81.9m in peer-to-peer lending platform Funding Circle, £71m in banking app Monzo and £50m in Revolut.
Radboud Vlaar of venture capital investor Finch Capital, says the influx of money into the sector was due in part to the delayed impact of the UK’s Brexit vote combined with a concentration of large amounts of cash on a few big investments.
“There was a mix effect of some start-ups and investors holding off following the Brexit news and then going back in 2017. In other words, a backlog. Next to that a couple of big fundraises such as Transferwise and Revolut.”
The term ‘fintech’ covers a diverse array of businesses. These include the payments market, where companies such as Transferwise are offering alternatives to banks when it comes to transferring cash between accounts. Innovation is also taking place in segments, such as alternative banking platforms, crowdfunding, peer-to-peer lending, fraud protection and credit checking. In Vlaar’s view, the current ‘hot’ sectors for investment are: “Insurtech, challenger banks, blockchain infrastructure plays as well as artificial intelligence.”
The London Effect
London, in particular, has become a hotbed of fintech activity, attracting 90% of the cash invested last year. That’s partly due to the success of the digital technology sector as a whole, which has found a home in the East of the capital where old commercial buildings have been converted into shared workspaces to house a new generation of startups. The result is has been the creation of the Tech City hub.
But Fintech is also thriving because of the scale of the London’s preeminence as a financial centre. Startups operating Tech City are working in close proximity to the financial centres of the City of London and Canary Wharf. That proximity gives them access to potential customers and perhaps more importantly, a well of financial expertise.
Fintech is set to be further boosted by new Open Banking regulations in the UK, requiring major banks to share account information, with smaller competitors. Meanwhile, at a European Union level, the second Payment Services Directive also legislates for information sharing and aims to make market access easier for non-bank financial service providers.