Broken TransferWise is all “smoke and mirrors”

By Oliver Smith 26 January 2016
TransferWise co-founders Taavet Hinrikus and Kristo Käärmann.

Currency exchange boss says TransferWise's $1bn business isn't all it's cracked up to be.

Calling Britain’s most high profile financial technology business “smoke and mirrors” and “vapourware” might sound outrageous, but that’s exactly what Nick England founder of VFX believes.

“Peer-to-peer currency exchange is just smoke and mirrors, it is conceptually broken,” England told  The Memo.

It’s a statement that fires a shot across the bow of one of London’s most high-profile tech businesses, TransferWise, a company valued last year at over $1bn and named one of Britain’s most innovative businesses.

It should be said that England is a 15 year veteran of the international currency exchange (FX) sector, and has spent the last four years quietly building his own FX business.

Last year VFX handled just shy of $10bn in international currency exchange, and last Friday England tells me his company handled $55m in a single day… basically he knows his stuff.

A house of cards?

It was nearly a decade ago that England first examined peer-to-peer currency exchange as a business model, at the time looking at a company that would later become MoneySwap.

The idea with peer-to-peer currency exchange is if you’re looking to send £100 to someone in France you send it to TransferWise and they match you with someone else wanting to send money the other way. Rather than sending your £100 across international borders your money is sent to the recipient of an equivalent transfer going in the opposite direction.

How TransferWise explains its business model online.

“We realised it would never take off because in reality if you look at the UK it’s all one-sided [e.g. lots of people send money to France, but fewer people are sending money back to the UK]. For peer-to-peer to really work you need an equal and opposite trade coming from the other side,” England told The Memo.

In the simplest terms what England means by that is Britain is full of people wanting to change Sterling into Euros for their holidays or send money to their families abroad. But once these people spend their Euros abroad there is only a tiny flow of people converting their Euros back into Sterling.

“Because of that peer-to-peer currency exchange is just smoke and mirrors, it is conceptually broken.”

Borrowing against the books, just like banks

England was left somewhat surprised in 2011 when the likes of TransferWise, CurrencyFair and MoneySwap not only launched, but started to grow with TransferWise now claiming to handle £500m in exchanges every month.

“But what actually happens is there isn’t harmony in these trades, so the companies in this space end up running a book [taking risk and buying currencies, often at worse rates, to fill the shortfall],” he says.

TransferWise buys currency from third parties to fill the shortfalls in its exchange and to match all those customers looking to send Euros abroad but with no counterparty wanting to send Sterling back.

“But if you’re running a book you’re taking risk and, if you’re taking risk, you need to price that risk in by widening the currency prices out that you’re offering. Eventually you just find yourself in the same position the banks are in.”

“They haven’t actually invented any new technology,” argues England. “They’ve just invented a new marketing model, what’s behind it is actually the traditional banking model.”

“That’s validated by the fact that TransferWise don’t use [peer-to-peer] in their messaging. Why don’t they use that messaging? Because they know it’s flawed.”

A word from TransferWise

We asked TransferWise for comment and just how much of their £500m in monthly exchanges are matched versus how many have to be backfilled by buying currency through a third party.

TransferWise declined to tell us how of their currency exchange has to be backfilled by buying currency, but told The Memo:

“TransferWise uses peer-to-peer where we can to match payments at the mid-market rate with one or several other people who are making an opposite exchange.”

“On routes where peer-to-peer doesn’t apply, for example some routes are one-way at the moment, then we go out to the interbank market and buy the currency in.”

England isn’t convinced and, unless TransferWise explains just how much of their business relies on expensive buying of currencies, we’re not sure we are either.

“I’d just be interested to know exactly how much of that £500m is actually matched up,” England says.

So would we.