Wise and the business of cross-border transfers: part 1

Every year, consumers the world over move ~£2tn across borders, with roughly 2/3s of that funneled through a labyrinthine network of banks¹. A typical cross-border bank transaction might look something like this: Amber, a US resident with a checking account at PNC, places an order to send Rupees to her mother’s account at Seylan Bank in Sri Lanka. PNC, after ensuring there are sufficient funds in Amber’s account and running proper KYC checks, directs that order to SWIFT, a communications protocol connecting more than 11k financial institutions. The PNC-originated order makes its way to a US correspondent bank like Citi, who in turn funnels that order to an Indian correspondent like HDFC Bank, who in turn delivers funds to their final destination through its direct connection with Seylan Bank in Sri Lanka.

The bank intermediating the transaction at each point will assess a transfer fee, the sum of which rolls up to Amber as an Overseas Delivery Charge that might run anywhere between, say, ~$20 and $70 depending on the number of hops and which borders are crossed. Those fees are sometimes waived for appearances sake but smuggled in through inflated exchange rates. Banks also impose cutoff times for processing transfers. Amber places an order at 2PM Pacific but Citi may not receive the funds from PNC for several hours, at which point HDFC’s cutoff deadline for the day has just passed, at which point Citi may just sit on that liquidity overnight before sending instructions through. Depending on the number of time zones involved, hold ups at one point of the money transfer chain cascade downstream. This series of fees and settlement delays resolves to a typical sender paying ~3%-7% of principal and a recipient waiting 2 to 5 days for their funds.

For all its faults, SWIFT is a useful innovation. It provides a consistent way to transmit payment details from one account to any other. In its absence, a bank that wanted to offer its customers the ability to send money to any account in the world would need to set up direct, bilateral connections with 10s of thousands of other banks. SWIFT reduces that upfront burden, but raises the ongoing cost and complexity of transmitting money from one country to another. You can imagine the opposite tradeoff, though, where an entity bears the significant upfront burden of connecting to lots of individual bank, but in return avoids the cumbersome process of hopping money across several nodes. That’s what Wise set out to do.

Source: Wise prospectus