NEWS

How does a company like TransferWise (Wise) operate better than the banks?

How does a company like TransferWise (Wise) operate better than the banks?

TransferWise (now rebranded as Wise) operates globally by using an innovative approach to international money transfers, which allows them to provide fast and low-cost services. Wise has built a global network and infrastructure that helps reduce the high fees and long transfer times typically associated with traditional bank wire transfers. Here's an overview of how they operate efficiently:

1. Local Account Matching (P2P System)

Wise doesn’t move money across borders in the traditional sense. Instead, they use a peer-to-peer (P2P) matching system. Here’s how it works:

• Local Payments: When a customer in one country wants to send money abroad, they make a local payment in their home currency to Wise’s bank account in that country.
• Matching in the Destination Country: Wise then pays out an equivalent amount in the destination country using funds from another customer who wants to send money in the opposite direction. Essentially, the funds are transferred locally in both countries, avoiding the need for costly cross-border transfers.

This method allows Wise to bypass the need for currency conversion and international transfer fees, significantly reducing costs and speeding up the process.

2. Currency Pools

Wise also operates currency pools to maintain a supply of local currencies in different countries. This way, if there isn’t a perfect match in the P2P system for a particular transaction, they can still fulfill the request by using funds from their currency pools to ensure liquidity.

These currency pools enable faster transfers, as Wise doesn't need to wait for a matching transaction to complete a transfer.

3. Mid-Market Exchange Rates

Traditional banks often use a mark-up on exchange rates to make money on international transfers. Wise, in contrast, uses the mid-market exchange rate (the rate you see on Google or financial markets), which is the fairest and most transparent rate available. They charge a transparent service fee, which is usually a small percentage of the transaction, and provide clarity on how much customers are paying.

4. Global Banking Network

Wise has established a network of bank accounts and partnerships with financial institutions across the world. This allows them to transfer money locally in each region, bypassing international banking systems such as SWIFT (which is slower and more expensive). By leveraging local payment networks, they can avoid the fees associated with international wire transfers.

5. Batch Processing and Automation

Wise uses batch processing to handle large volumes of small transactions efficiently. By grouping multiple transactions together, they reduce costs on their backend, which allows them to process transfers quickly and at lower fees. Much of their process is highly automated, which reduces human errors and operational costs, enabling faster transfers.

6. Regulatory Compliance

Wise operates in multiple countries, and compliance with local and international regulations is a critical aspect of their business. They have obtained licenses as a money transmitter or payment institution in various jurisdictions, allowing them to operate legally in different countries.

To maintain compliance, Wise must adhere to:

• Anti-Money Laundering (AML) laws
• Know Your Customer (KYC) regulations
• Payment Services Directives (like PSD2 in Europe)
• Data Protection Regulations (like GDPR in the EU)

They invest heavily in compliance infrastructure to ensure that they meet these legal requirements while still providing fast and cost-effective services.

7. Technology Infrastructure

Wise’s technological infrastructure is crucial to the efficiency of its global operations:

• Cloud-Based Platform: Wise uses cloud technology for its platform, allowing for high scalability and availability across different markets.
• API Integrations: Wise integrates with various financial institutions and payment systems through APIs, which allows for fast and secure communication and transaction processing.
• Real-Time Notifications: Customers can track their transfers in real-time and receive notifications when the transfer is complete, improving transparency and trust.

8. Transfer Speed

Wise's local transfer method and their use of domestic clearing networks make transfers much faster than traditional cross-border wire transfers. In some cases, transfers can happen within minutes, depending on the currencies involved and the payment method used. Here’s how speed is enhanced:

• Instant Payments: In certain corridors (e.g., between EU countries with SEPA payments or within the UK with Faster Payments), transfers can be instant.
• Batch Payments: Wise processes payments in batches where appropriate, making the entire system more efficient.
• Different Payment Methods: Customers can use bank transfers, debit cards, or even credit cards, which can also affect the speed of transactions.

9. Transparent Pricing

One of Wise's key selling points is its transparent pricing structure:

• Customers are shown exactly how much they are paying in fees and what exchange rate is being used before they confirm the transfer.
• The fees are broken down clearly, and the customer knows exactly how much will be received on the other side.

By keeping the costs low and providing a fair exchange rate, Wise has attracted millions of users who value transparency and low fees in international money transfers.

10. Multi-Currency Accounts

Wise also offers multi-currency accounts (Wise Borderless Account), which allow individuals and businesses to:

• Hold and manage balances in multiple currencies.
• Receive payments in different currencies using local account details.
• Convert between currencies at the mid-market exchange rate when needed.

This is especially useful for freelancers, remote workers, and businesses that operate internationally, as it reduces the friction and cost associated with currency conversion and cross-border payments.

11. Global Expansion Strategy

Wise has grown rapidly by expanding into new markets and obtaining local regulatory approvals. They have opened offices worldwide and continue to build relationships with banking partners and payment networks in each region they enter. Their global presence allows them to maintain a local payments infrastructure in more than 80 countries, making them a truly global player in the financial technology space.

Conclusion

Wise operates globally by using a combination of local payments networks, currency pools, transparent pricing, and advanced technology to process transfers quickly and affordably. Their approach circumvents traditional cross-border fees and delays by leveraging local banking systems, peer-to-peer matching, and efficient currency exchange mechanisms. This model allows them to provide a superior service at a fraction of the cost of traditional banks, while still ensuring compliance with international financial regulations.