The CEO of one of Australia’s biggest foreign exchange companies says the peer-to-peer technology pioneered by fintech startups like TransferWise is “an incomplete model” that only works in “fair weather.”
Peer-to-peer currency transfer is where platforms match buyers and sellers looking to make the same exchange, rather than the traditional brokerage model. If I want £10 worth of euros — a platform like TransferWise or CurrencyFair will find someone who wants to buy £10 with their euros and link us up.
Other startups using the peer-to-peer model for international money transfer include Midpoint, CurrencyFair, and WeSwap.
OFX Group CEO Richard Kimber told BI: “The major challenge with the business model in peer-to-peer is inherently it assumes you’ve got an equal amount of buyers and sellers is any given currency.”
“When you’ve got currency moving dramatically one way or the other, what you can have happen is it encourages asymmetric activity. As we saw in Brexit, you had lots and lots of sellers and very few buyers. That can lead to an inability to transact because you simply have all these sellers lined up and no buyers. That’s one of the reasons why the peer-to-peer players opted out of their model during this period of volatility because it wouldn’t have been sustainable.”
Both TransferWise and Azimo, another online money transfer startup, limited business or stop transfers altogether around the Brexit vote, which saw huge swings in the pound. Azimo told the FT it was forced to stop its activity because of restrictions from Barclays. But this points to another weakness among the new tech-driven startups trying to break into the market, says Kimber.
“The challenge around the relationship is the bank will always give you an exposure or credit limit dependent on your stature,” he says. “They are effectively a startup with unknown profitability. It’s a bit like going for a home loan when you don’t have a permanent job — the banks not going to lend you very much.”
“Whilst you are break even or near that, their credit limit would be very small. You have to post collateral which is a proportion of the risk of their exposure. That’s the challenge they have got, you do need significant reserves to be able to operate in global financial exchange. It’s not something you can just do with a technology solution, you really need the strength to be able to play in the markets we’re in.”
OFX, which also operates in the UK, has been around for 17 years and has processed £50 billion worth of transactions since inception, with £10 billion alone transferred last year. For comparison, TransferWise’s most recently disclosed figures show an annual run-rate of £6 billion and £3 billion transferred to date.
Addressing TransferWise, Kimber says: “I think they are good at marketing so kudos to them on their marketing. I think they’re good at using social media. I think the one thing that they do is they’re strongly and firmly anti-bank, whereas we’re not, we believe fintech should work with banks and that we can compliment their services.
“Banks aren’t going away. Ultimately I think banks do play a role — they’re not always the most cost-effective, they’re not always the friendliest.”
Business Insider contacted TransferWise for comment but the company did not respond in time for our deadline.
Kimber ran phone bank First Direct in the UK from 2004 to 2006. He has been CEO of OzForex for 15 months and prior to that was Google’s regional head for South East Asia.
There’s no natural advantage to being peer-to-peer
He says: “I think the phrase peer-to-peer in money transfer will start to fade. Certainly, the experience of Brexit shows that the model has deficiencies. It’s a particularly strong marketing angle and so I think in terms of being a disruptor/alternative to banks, I think that’s where the focus will move.
“I don’t think there’s anything inherently unique in claiming to be peer-to-peer because there’s no natural advantage to being peer-to-peer. TransferWise’s pricing is no better than ours, in fact, ours is better than theirs. Ultimately there is no benefit.”
Nick England, the CEO of another foreign exchange company VFX, raised similar issues with the peer-to-peer model in January, telling The Memo the idea was “conceptually broken.”
As TransferWise has grown, it has moved away from a pure peer-to-peer play towards a more traditional model. Cofounder Kristo Käärmann told BI last year: “We always work with a local liquidity provider, someone who has the opposite flows or is able to aggregate the opposite flows. We work quite hard to find a partner who has these flows and is willing to exchange them at a reasonable margin so that it doesn’t become a cost for our customers.
“There’s a lot of little transfers going into the market and then there’s a local liquidity provider making the move in the other direction. It’s still p2p in a way but there’s one or two players on the other side.”