The recession has thus far bought casualties to enterprise across the globe and throughout every sector. As a direct response, increasing numbers of companies have turned to outsourcing freelancers, hiring remote staff and using external organisations to manage call centres, distribution and more – all in an effort to make their money go a little further.
In today’s digital world, these outsourced partners are often in a different postcode – and often in a different country altogether. Payment can become be an issue, with transactions in multiple currencies and to varying countries becoming standard practice. Yet banks clearly see businesses as little more than ‘cash cows’ – charging extortionate transfer rates as an easy way to gouge money and boost their profits and bonuses.
By our calculations, banks are earning a massive £21bn a year – or £1.73bn every month – in charges levied on businesses sending or receiving money overseas. If you’ve ever had to send money overseas, you’ll be only too aware of the painfully high charges and poor exchange rates forced upon you. All up, banks pocket between three and five per cent per transfer for a practice that’s little more than a few clicks of a mouse.
– On a £10,000 transfer, bank charges total approximately 3.5% (i.e. £350)
– On a £1,000 transfer the charge rises to approximately 5% (i.e. £50) – On a £100 transfer they pocket between 15 and 20% (i.e. £15-£20)
These charges date back to a pre-digital, analogue era when banks enjoyed a stranglehold over the business community. However, as the Internet continues to radically alter every part of our lives, the digital revolution is forcing banks to amend their practices.
A number of innovative start-ups have recently taken flight to combat the scourge that the banking sector has become. Peer-to-peer lending organisations such as Funding Circle and Squirrl have sprung up to enable anyone to invest directly in a company, bypassing the banks completely – and often providing higher returns than a bank could ever offer.
In establishing TransferWise, we chose the same model to enable users to send money directly to a business or individual, skipping the banks and their cash grabs.
Traditionally, banks have been the only way you could invest, save and transfer funds. However, the tide is turning and a new generation of tech-savvy lenders and investors, who have grown up with a mistrust in the banking system, are now switching to these independent peer-to-peer companies in huge numbers.
There’s a definite shift in power happening in the personal and business finance scene and banks need to shape up or ship out. With a large percentage of the blame for the current economic downturn lying squarely at the feet of our greed-obsessed banks, now should be a time of evolution for these dinosaurs of finance. If Barclays’ involvement in the LIBOR scandal taught us one thing, it’s that the time for underhand dealing is over and a new generation of transparent, open banking needs to take its place.
For hundreds of years, the ‘old-boys’ network’ mentality has reigned supreme, but recent exposures have shaken these foundations and the banks are struggling – both financially and, just as importantly, with trust.
Time will tell whether the banking sector in its current form will weather the storm. I have no doubt more underhanded and unethical dealings will be exposed before the recession is through – but the current climate is a very exciting place to be.
No longer are we bound by the shackles of large banks. Instead, we are free to choose how to manage our money, and with whom.
Maybe the doors have closed for traditional banking, but the floodgates are open for innovation in all areas of finance.
Words by Taavet Hinrikus, Co-founder of Trasferwise