Banks are facing a huge wave of competition from financial technology, or fintech, startups who are eating away at various parts of their business by using technology to do the job faster, cheaper and better.
One of the highest profile areas of attack on the banks has been in the international money transfer market.
London’s TransferWise waged a huge PR campaign, bashing the banks for hidden fees and poor service, this year. In the process, it has earned a $US1 billion (£640 million) valuation and reached £500 million ($US786.9 million) worth of transfers through its platform each month.
The banks themselves were quiet during all of this, preferring to keep a dignified silence rather than get down and dirty with TransferWise and argue their case.
But the boss of a fintech company offering a similar service to TransferWise says banks are secretly very worried about the rise of rival foreign exchange (FX) startups.
Banks charge commission and other fees on sums of money sent abroad by ordinary consumers. But businesses like TransferWise are undercutting them with lower fees and taking more market share away from banks. This understandably eats into banks’ revenues.
Brett Meyers, CEO of CurrencyFair, told Business Insider: “I’ve had conversations with people at banks who say at board level they realise this foreign exchange revenue isn’t going to be around forever.
“I think it’s a good money maker. It’s not something they’d want to lose. There’s the issue of whether they can compete without completely reinventing their business because of their legacy systems.”
Currency Cloud CEO Mike Laven made a similar point to Business Insider earlier this week, saying: “Banks have built up a series of legacy systems over the years so they actually have to charge higher fees. It’s not that they’re bad people. Banks just have a higher cost base.”
Dublin-based CurrencyFair provides a marketplace for foreign exchange, letting people swap currencies at an agreed rate directly with one another. CurrencyFair does not actually transfer money internationally, but pays out from localised accounts it keeps in countries. This keeps fees down.
Meyers says: “A lot of banks are investing in businesses like our as a way of hedging. I’ve had more than one conversation about that over the last few years. We will be looking to raise money next year and we wouldn’t rule out the banks.”
Barclays has launched an “accelerator” programme for startups, in some cases working with them. Santander has also launched a $US100 million fintech investment fund, while the likes of Goldman Sachs and JPMorgan have also backed fintech startups.
For the banks, it makes more sense to invest in a lean startup, or maybe buy one, than it does to rip up their entire systems and rebuild them. Meyers, who used to working in banking himself, was evasive on the question of whether banks have tried to buy CurrencyFair.
The startup, which operates across Europe and Australia, recently raised €10 million (£7.12 million) and plans to put that cash towards marketing and expanding to the US.
CurrencyFair has been going since 2010 and started 9 months before TransferWise. Meyers says: “We’re tracking them relatively closely. We’re both tiny in the scale of this market.”