Fintech: MBA's P2P Foreign Exchange Start-Ups Challenge Big Banks
Niche players have been biting at the fringes of large lenders' business models, and foreign exchange faces growing competition from digital start-ups.
The disruption of traditional business models has been salient and the financial services sector is poised for a further shake up in foreign exchange.
Niche players have been biting at the fringes of big banks’ business models but a venture has not yet emerged with the scale to rival established institutions. This has not stopped MBA graduates from trying.
Ismail Ahmed, chief executive and founder of online money transfer market WorldRemit, brands the start-up as a low-cost alternative to traditional high street agents. Users can send cash to more than 110 locations, across continents.
He sees WorldRemit as an opportunity to shake-up a “stale” industry. “We are taking money transfers into the mobile age,” Ismail says. With an EMBA from London Business School, he incubated his company at LBS’ Entrepreneurship Summer School.
Ventures like WorldRemit are driving a transformation in culture at business schools, away from corporate careers and to start-up ventures.
“We have great talent in our ecosystem,” says Margaux Pelen, executive director of the Entrepreneurship Center at HEC Paris, a top French business school. He says entrepreneurs, investors and mentors form unique, tight-knit communities at schools. “Everyone pulls in the same direction.”
Founded in 2010, WorldRemit has since raised nearly $150 million in funding from backers including TCV, a Silicon Valley venture group that was an early investor in Facebook and Netflix.
The crowdsourcing model of currency exchange is the latest challenger to traditional financial services groups.
Peer-to-peer foreign exchange websites like Midpoint and Currency Cloud take away the middleman by offering consumers mid-market rates and by taking a flat transaction commission.
Richard Lumb, Accenture group chief executive for financial services, says digital technologies have the potential to both disrupt and transform banking. “Banks need to innovate faster, become more nimble and develop a more entrepreneurial culture if they are going to compete effectively and meet customers’ needs,” he says.
Peer-to-peer lending and equity crowdfunding have already begun to make a small dent in the established finance industry. Foreign exchange providers will hope to emulate the success of P2P lenders like Prosper and Lending Club, which floated last year.
More than $8 billion has been lent through P2P platforms in the US and Nesta, a UK innovation charity, forecasts that the UK market will grow to £4.4 billion this year.
Brett Meyers, CEO of CurrencyFair who studied at IMD Business School, says this form of “people-powered finance” is going to change the market forever. “We’re laying down a major challenge to the banks by facilitating the cheapest, fastest and fairest way to transfer money [at] home or abroad,” he says.
CurrencyFair was the first platform to break the $1 billion barrier in money-matching transfers. The online P2P currency exchange company estimates the market for P2P forex is growing at 500% annually and will provide £250 billion of currency transfers by 2017.
Forex is a small slice of the pie. Global investment in financial technology increased at more than three times the rate of overall venture capital investment, tripling from $4 billion in 2013 to $12 billion in 2014, according to new data from Accenture.
The UK and Ireland accounted for more than two-fifths of the European total, as clusters of fintech start-ups have emerged in London and beyond.
Fred Destin, partner at venture capital firm Accel Partners, says he has seen the London ecosystem flourish and go from strength to strength. “London entrepreneurs are building technology leaders of global significance,” he says.
TransferWise has been one of the noisiest challengers. “Our mission [is] to stomp out hidden bank fees and make the world of money transfers a fairer place,” says Taavet Hinrikus, co-founder of TransferWise, who earned an MBA at global business school INSEAD.
London-based TransferWise plans to push into the US, after a $58 million funding round led by Andreessen Horowitz, the venture capital group that has backed Airbnb and Twitter.
Taavet is critical in his assessment of banks. “It’s outrageous that they can get away with advertising that claims their transfers are ‘fee-free’ despite often taking up to 5% of the money sent through the exchange rate,” he says.
Banks, however, say their charges offer comprehensive protection. In the UK, P2P forex companies are regulated by the Financial Conduct Authority, but critics say there are risks in allowing people to offer and choose their own rates.
Julian Skan, who heads the FinTech Innovation Lab London, points out the increased co-operation between traditional banks and innovative financial technology start-ups, which could result in new business models and revenue streams.
Working with tech start-ups is a challenge for traditional banks but they seem to recognise the need.
Spanish lender BBVA, for example, acquired online bank Simple and has invested in Coinbase, a bitcoin start-up. In the UK, Santander UK has a partnership with Funding Circle, the P2P lender, and RBS launched a similar scheme this year.
“Fintech is empowering new competitors and start-ups to move into parts of the banking business,” says Julian. “But paradoxically, it is also helping banks to create better, more convenient products and services for their clients.”
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