Why TransferWise has fees?

Money is information. Using, storing, moving money should be as cheap and instant as exchanging information. As cheap as sending an email. And certainly it shouldn’t be more expensive or slower if the information crosses country or currency borders.

That’s not the reality. World Bank calculates that people lose 7% on average on cross border, others triangulate the total fees banks charge be $200bn. With TransferWise we’ve brought the fees down to 0.3% on some routes, but we believe it can and should be much cheaper. We have made 27 price drops in the last 9 months and plan many many more. Here’s how we do it.

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Your free debit card is not free

I’m between rental flats in London and chose to rent a cottage in Essex for two weeks. I found it on Airbnb and paid the landlord ca £1000 for that. Crazy prices around London.

The landlord got most of it, Airbnb got a good margin, but I was fascinated to pay £2 to my bank as a hidden fee on my debit card. It doesn’t show up anywhere on my card statement, but this is what Airbnb had to pay to the bank that issued my card in what is known as an interchange fee.

Interchange is a malaise

Interchange is a curious phenomenon – an arrangement that renders the magic of free-market competition limp and powerless. It is a 3-way agreement between the issuing bank (e.g HSBC), the card scheme (e.g. Visa) and the merchant (e.g. Amazon) – that a percentage of the transaction fee should be paid to the issuer. In practice it is really only an agreement between the card scheme and issuing banks. The monopolistic position of Visa and Mastercard leaves the merchant without any say – they either pay up or lose the ability to sell to these card holders.

Most card holders are oblivious of such a fee, but merchants are painfully aware of it. To the extent that where they can – they will avoid taking more expensive card schemes, such as American Express.

There were £520bn in debit card payments in the UK in 2016. Banks earned at least 0.2% on that volume in these interchange fees. It is a small percentage when you’re buying a coffee, but adds up to a handsome £1.04bn annual fee revenue to UK banks.

UK: “card holders aren’t paying their banks enough”

That’s what Visa must have thought when they decided to remove the 50p cap in September 2016. Previously the interchange on larger amounts, such as my cottage rent was capped at 50 pence, on consideration that there is no logic on the bank getting paid more on larger payments than smaller ones, given their cost structure is transaction based.

How do the regulators allow this?

There is zero incentive for the banks and card schemes to lower interchange. That’s why we see regulators stepping in. Without regulators we’d be still paying 3% as was common in the 90s. Many regulators have noticed that banks are getting paid enough already.


The Spanish have capped the interchange at 7 cents. Yes, your Spanish bank is getting no more than €0.07 when you buy coffee or book your flights with your debit card. I’m sure that is plenty to cover the cost of electricity, internet and the upfront cost of servers and software.

The Netherlands

Dutch, the inventors of modern digital banking with ING, have figured it doesn’t really take 7 cents to process a transaction, so they have capped it at €0.02.


Irish didn’t just take the EU level caps as given and thought about it independently. They have interchange at 0.1% and capped at €0.50.

United States

US has tried hard to create competition and it hasn’t been easy. For example, they require each card to work on two schemes, usually one is Mastercard or Visa and the other one a small player no-one has heard of.

They have also limited the amount that can be charged as interchange with debit cards.

An issuer […] may not receive an interchange fee that exceeds 21 cents plus 0.05 percent multiplied by the value of the transaction, plus a 1-cent fraud-prevention adjustment.


The interchange fees used to be the wild west in  Europe until the Interchange Regulation 2015 came into force and capped the debit card to 0.20% and credit card interchange to 0.30%

Is there a solution?

Not yet. In the longer term there has to be a way to create competition between card schemes and incentivise alternative more secure payment options to emerge. Until then we can only hope to follow the example of the Spanish and Dutch to use the force of regulators setting the interchange fees.

Euro 2.0 weekends

Can money exist without a banking system? “Sure,” say the bitcoin enthusiasts. But can we have the same kind of money that we’re used to – euros, dollars, yenis? The invention of smart contracts makes it a practical opportunity.

We are half-way through building a proof of concept for a tech savvy country to run a bankless monetary system in parallel with the traditional one. A few friends put together the infrastructure using Estonian ID system over a weekend, we’re now planning for a second iteration and you’re welcome to join if you believe you can help.

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The future of money may be in the ether

Two years ago I got very excited by the idea that it will be possible to decentralise the handling of money in my small country Estonia. I’m not talking about geeky bitcoins, but the real Euros. I wrote this blogpost, chatted with bitcoin people this and the other side of the Atlantic. At the time it certainly felt do-able, but needed quite a bit of technical and cryptographic wizardry.

Now we have the Ethereum programmable blockchain. It took me a couple of hours on a Saturday morning to successfully implement a central mint and a monetary system using a public recipe, together with necessary enforcement controls to tackle money laundering and other bad things.

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