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.

We’ve made plenty of progress and are really proud about it. Depending on the amount, it can easily be 8x cheaper to use TransferWise over your bank. We will eventually get the cost very close to zero and most transfers happen instantly. But why is it so hard – why does it still cost money to move money on TransferWise?

Why do we still have fees?

Firstly, it still costs us money to move money. Even 8 years later since we started working on it. There are direct costs related to moving money from your bank to us, making payouts in 56 countries and managing liquidity across our network. A lot of work we have automated, but many things we still need to do manually – whether that is operating payments, onboarding users or answering emails, calls and chats when users need help. Just to put it in context, we respond to 60,000 user contacts every month.  All the people doing this work make up our servicing cost.

Secondly, it costs money to make payments ever cheaper. That’s mostly our engineering and product-building investment. On our most efficient routes we invest nearly half of the fees back into product – into engineers, working on making payments faster, cheaper, more convenient.

The big buckets of our costs split across these three groups:

  • direct costs: transaction and volume
  • servicing costs
  • investment

Here’s an example of a 2000 GBP transfer on one of our more efficient routes, with a fee calculated as 80p + 0.4%.

x

Card fees

Pay-in costs from cards can change the economics significantly. On the same route card interchange charged by the issuing bank adds 0.2% to the cost and make the transfer 50% more expensive.

How can we make it cheaper?

As we got really anatomical with the costs, it became abundantly clear how we can get the cost of transfers down even closer to zero. Every part of the cost formula has its own solution.

Direct cost ~30%

Solution: competition. If you’ve ever tried negotiating fees with a bank you know it is a waste of time, until you have a competitive offer from another bank on the table. In most countries we’re connected to the local payment systems through multiple local banks. Partly to ensure our users can still make payments if one of the banks goes down, but equally importantly to be able to negotiate the fees.

The only thing better than having multiple banks is having no banks at all. When we started in the UK the best I could negotiate with a commercial bank was £1.50 per payment. Since we’re directly connected to Bank of England and the payment network – this cost has gone down 50x.

Servicing cost ~20%

Solution: automation. In fact automating the manual processes and interactions with local banking systems is only part of the solution. The other part is building a product experience, which is so obvious that it doesn’t raise any questions. If the experience is so clear, then users don’t get confused and they never need to call up.

Investment ~50%

Solution: growth. Since 2011 we have always been searching for, interviewing, hiring and onboarding engineers. Every day, for 7 years and counting. Our product engineering team has grown to 300 people. It’s been crazy fast. But our volumes have grown much faster. This means that our growth of volumes keeps outpacing the speed at which we can onboard new people, this investment naturally becomes a smaller proportion of your transfer.

The biggest drivers are our users themselves – every person and a business they tell about their TransferWise experience will be a potential new user, bring more volume to the platform and make the costs cheaper for everyone. It is worth investing into that experience.

The principles of a price mission

Money without borders – instant, convenient, transparent and eventually free. We’re powering money for people and businesses: to pay, to get paid, to spend, in any currency, wherever you are, whatever you’re doing.

While working towards our mission zero, we have understood some guiding principles that make it easier for us to drop fees. In order to achieve mission 0, we need to get to mission 0.1% and even before that to mission 0.2%. We have just reached 0.3% on some routes, the road ahead is clear.

We have worked out a few guiding principles for ourselves

  • Don’t cross-subsidise.
  • Don’t cross-subsidise currency routes. We operate 1400 currency routes and it is much cheaper to move money between USD, GBP, EUR than for example from Brazil to Kenya. If we want every route to be as cheap as possible, they cannot subsidise other routes.
  • Don’t cross-subsidise payment methods. Our users send money from bank accounts and usually there is a low cost option of a bank transfer and a faster, more convenient option of debit cards. In the US there are two expensive options: the low security of ACH and overpriced wires.
  • Don’t compete. If another team outside TransferWise has figured out how to make a route cheaper than us, then we should learn from them but until then we should recommend our users to use this other provider. [link to comparison tweet]
  • Align structure to cost: transaction + % volume.
  • Make it easy to go fast. We have agreed a formulaic mechanism across the organisation, which looks at our last few months costs on the routes and determines if we can reduce our prices.

Following these guidelines we have become very exact in the pricing. Every route has their own price and their own journey towards zero. Recently one of our first investors Jesse Beyroutey shared his thinking on why does it make sense to fund this price lowering mission.

Progress to date

Our first prices we set in 2011 at 0.5% and we set a minimum, e.g. £2.00 to make sure we cover the transaction costs. It turned out our costs behaved differently.

With the first round of price changes we changed from minimum fees to transaction fees. It has the positive effect of making small payments under £400 and large payments cheaper, but also a negative effect for people transferring between £400 and £800. A lot of transfers fall into that bracket and for many users we first had to bring bad news due to that correction.

  1. 🇬🇧 GBP – Oct ’17. For the first time we broke below the 0.5% fee and priced GBP to EUR at 0.35%.
  2. 🇺🇸 USD – Jan ’18. We brought the most efficient routes down to 0.6% for wire transfers, direct ACH debits at 0.75%. Moving money in the US is expensive.
  3. 🇦🇺 AUD, NZD – Feb ’18. Many routes came down from 0.7% to 0.45%.
  4. SGD, JPY, HKD – Mar ’18.
  5. 🇸🇬 SGD – Apr ’18. We reduced our prices the second time. Almost every route and every amount got a price reduction.
  6. 🇧🇷 BRL – Apr ’18. Brazil is the most expensive country to send money from, even more complicated by the funds expatriation tax IOF.
  7. 🇨🇦 CAD – May ’18. Most efficient routes came down to 0.6%.
  8. 🇭🇰 HKD – May ’18. Reduced fees for biggest routes for the second time.
  9. CHF, HUF, PLN, BGN, RON, CZK, HRK, SEK, NOK, DKK – Jun ’18. We changed prices on 460 currency routes simultaneously. First time achieved 0.3% on a route, eg CHF to EUR.
  10. 🇪🇺 EUR – Jul ’18. Most European routes came from 0.5% to 0.3% .. 0.4%.

What’s next?

More price drops. We have two goals – we’ve shown that 0.3% is sustainably possible on some routes – how can we now get most of the worlds’ routes onto 0.3%. The next challenge is 0.2% 🙂