Remittances abroad are attracting competition

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Newcomers have launched an assault on another market where banks used to hold sway: foreign exchange. By one estimate, consumers and small businesses make cross-border payments worth $5 trillion-10 trillion a year, and often complain about the banks’ snail-like service and preposterous fees. In the $550-billion-a-year market for remittances by migrants, competitors such as Western Union (now itself under threat) have already given the banks a run for their money. But most people make international payments only rarely, and had to accept what the banks offered.

currency-exchange5Recently dozens of hungry startups with lower costs have piled in. TransferWise, based in London, claims that its charges are up to 90% lower than the banks’.

Foreign Exchange

Customers pay £5 for converting £1,000 into euros, say, at the mid-market rate, whereas banks will typically have one rate for buyers and another for sellers, making a profit on the spread.

Like peer-to-peer lending and the Uber-style sharing economy more broadly, it works by matching buyers and sellers, tapping wholesale markets to plug gaps as needed. Technologically this is hardly ground-breaking, concedes its founder, Taavet Hinrikus:

“Technology is an enabler of what we do, but a lot of the innovation is business-model innovation.”

Few who have used online moneychangers, including your correspondent, have ever gone back to their banks for foreign exchange. But what is good for the public may not make for great businesses: margins are likely to be thin.
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Original article:

The Economist – Special Report