11th June 2019

The Evolution of Overseas Money Transfers

The concept, idea, use and evolution of money through time showcases the growth of humankind and its ability to adapt. Money represents and quantifies value in a universal framework. It is a “language” that was designed to be understood all over the world and make sense of the idea of value.

One of the most impressive and notable stories emanating from the journey of money through time is money transfers. How did it all start? When did money actually start crossing borders without the need for a physical exchange of printed paper?

Understanding the details, bottlenecks and evolution of money transfers will help us appreciate the difficulty of such an undertaking but also foresee the future of this specific niche.

Let’s dive right in.

How it all started

Whilst the history of money dates back a lot of centuries and traces its roots in the bartering trade, our story will start just a couple of centuries back, with the birth of wire transfers. The year was 1871 and Western Union was able to make the first wire transfer using its telegraph network.

All you had to do was walk into a telegraph office, pay the desired amount and the operator would employ a series of passwords and codes to authorize the release of funds and transmit the message from point A to point B. The trend was picked up throughout the 19th century by Federal Reserve Banks as well as businesses. Globalization and the booming of international business created the need for people to both send and receive funds across borders.

International Payment Network (SWIFT)

Moving into the 20th century, the international payment system was due for a major change and revamp. 1973 saw the introduction of SWIFT which was the much anticipated radical change: an international network for secure financial messaging.

SWIFT stands for the Society for Worldwide Interbank Financial Telecommunications. The way it works ensures that all parties involved are on the same page, speak the same language, are protected and served in the most efficient way.

How does the SWIFT system work then? It’s simple. Each financial organization that partakes in the network is assigned with a unique code that has either 8 or 11 characters. The characters stand for: institute code, the country code, the location/city code and individual organizational branches.

What’s important to note here is that SWIFT is simply a messaging system. It does not withhold money or account information. The messages that go back and forth the SWIFT system are the authorization orders for transfers to pass through.

One could argue that the SWIFT system is the cooler, digital version of the original telegraph network used by Western Union.

PayPal breaks uncharted territory

Formerly known as Confinity Inc, the company was put together in 1998 to create a software for safe financial transactions. The big break for this new company came in 2000 when someone you might have heard before, Tesla owner and modern-day Iron Man Elon Musk, merged his online banking company x.com with Confinity. By 2002 the company was rebranded to PayPal and went public.

2002 was also the year when PayPal was acquired by eBay for the staggering (for the time) amount of $1.5 billion, making it the default payment system of the famous marketplace. This move helped PayPal gain notoriety and become the go-to solution for online money transfers.

What PayPal managed to achieve was normalize the transferring of money through the world wide web.

The pain points

Whilst the international money transfer trade came a long way in the span of only a few years, a new set of challenges rose to the surface. Originally, simply managing to transfer money overseas was seen as a breakthrough. Digitizing the process was the next milestone but like with everything in life, it didn’t take long before this newfound “luxury” was priced in and considered the norm.

Once transferring money using the Internet lost its novelty, the pain points of this process became abundantly clear: speed, cost and safety.

Transferring money overseas can’t happen instantly, it costs money and there are always questions regarding the security of the transaction.

The miracle of FinTech

Financial technology is the gift that keeps on giving when it comes to the evolution of money transfers. Leveraging the insane power of technology, startups all around the world have built products, solutions and services to address the pain points of the money transfer industry.

Companies like TransferWise and Remitly gave an alternative, cheaper option of transferring money abroad. Picture you are based in London and you want to send money to your friend in New York. What would happen if you chose to use a bank or a traditional provider to send the funds is the following. The intermediary would quote you with a price for the transfer that would include transaction fee plus a hidden, exchange rate fee.

Sending money would actually cost you more money than you would hope for. How did FinTech startups manage to get around the problem? Just have a read at this TransferWise blog explaining how their technology allows them to offer cheaper transfer rates.

“Our smart technology links local bank accounts in countries all over the world. So often we’re able to use money from a TransferWise user sending money the other way around. Once we get that sorted, we’ll give you an estimate of when your money will arrive – usually it’s much faster than a bank transfer.

If you provide your recipient’s email address, we’ll also give your recipient a heads up to let them know your money is on the way. It will go right into their bank account.”

The entire premise of the TransferWise app is the peer-to-peer model. How does P2P work? It removes the middleman from the equation and uses the P2P platform to connect you directly with a “stranger” in the country you’re looking to transfer money to.

The money never actually crosses borders. The money never actually leaves the P2P ecosystem. It just uses partakers from the same country to credit and debit the account that needs to receive/send money.

The benefits? Faster, cheaper and safer money transfers.

Where do we go from here?

Where does the remittance industry go from here? The potential and pathways are endless but if we could sum it all up in a phrase, this would be it: digital wallet. Digital wallets are creating a broad ecosystem where banks, individuals and businesses can manage and handle finances from one single app.

This newly, digitally-connected payments landscape has a lot of potential to grow even more if you take into consideration the developing technologies that support it.

Blockchain technology for example is a new breed of technology we need to keep an eye on. To put it simply, it’s a decentralized network that eliminates the need for a middle man. Sounds familiar? Whilst still in an infant stage with loads of challenges to face, blockchain is very promising as an alternative technology route.

5G is the other major breakthrough that will surely bring major changes in the international transfer space. With 5G, current users of the remittance industry will enjoy faster, more efficient transactions. The real opportunity though is found in the parts of the world where population is still unbanked. Whilst it will still take several years to develop the right infrastructure for 5G in such territories, the advancements in international money transfers will fast-track the process significantly.

One area of interest when looking at the future of international money transfers is regulation. The space is constantly evolving and it’s only a matter of time before laws and regulation adapt to the digitization of the process. Key reference points to keep an eye out is the handling of personal and sensitive information as well as the “float” time of transferred funds.