The Fastest Way to Send Money? Carrier Pigeon!
Posted on Sep 3, 2015 by Iñigo Rumayor
Last week I went to UPS and sent a contract to one of our partners in Mexico. I went through the usual ritual of sending a package and provided the information of the sender and recipient; I also chose to send it express, meaning that the package would be received in 24 hours. I paid $25 USD for the service.
Right after sending the package, I came back to the office and sent an international wire to pay one of our contractors. So I similarly went through a ritual of filling out a form, including the tedious information of the sender and recipient to send the wire. My bank told me that it would cost $40 USD to send the wire.
What happened the next day blew my mind: A day later, my package had arrived right on time. I tracked the package at each step of its transmission and even got a photo of the signature of the person who received it, whereas my wire hadn’t been received. The bank didn’t know where my funds were and couldn’t explain why they had not arrived as intended.
After almost 3 days of back and forth and dozens of calls to customer service to both the recipient and sending bank, the funds were finally received.
It occurred to me that when it comes to sending money internationally, it is actually a better experience to stuff an envelope with money and send it in the mail than sending it with an international wire. I can guarantee that your experience will be better.
This is how the experience of sending money is actually better via physical courier than over digital channels.
One would think that flying a package across the United States to Mexico and going through the rigorous inspections in customs will make the process of sending a package internationally slower than the exchange of some data files over the internet. Turns out that isn’t the case.
There have been all kinds of amazing advances in the underlying technology in the field of international logistics. Unfortunately, the same can’t be said for the underlying technology of international finance. International wires can take from 2 to almost 20 days to process!
The reason why it takes up to 20 days to send an international wire is because the underlying wire infrastructure is based on cooperation between banks in different countries. To process an international wire, many banks need to get involved to connect the transactions together with each ledger in the connecting banks being effected. While it seems like a bank to bank transaction would just involve one bank, like the world of international logistics, many third parties have to get involved to fulfill the transaction. Each party involved slows down the process.
This is a diagram of the mess:
These days various money transfer services provide the illusion of instantaneous money transfer when in fact the funds being transferred have not been physically received. Xoom, for example, presents to their customers that funds will be received in minutes. This is in fact smoke and mirrors. While to customers they do in fact provide instantaneous money transfers, they only are able to only able to do this by fronting the funds to the recipient on the foreign country while they collect the money from the sender. The fund collection can take up to 3 days.
Naturally this creates a huge burden on Xoom – if the sender’s funds don’t clear, Xoom will be out of the cash, but Xoom will never know this for up to 3 days! This creates a risk exposure on Xoom’s side that could cost them millions of dollars per year.
This speed is what customers demanded, and providing that to their customers allowed Xoom to gain considerable traction. The unwillingness of banks to update its infrastructure has forced fintech startups to find hacks around the underlying banking infrastructure to deliver the speed demanded by users, while creating a significant risk exposure for themselves.
2. Price and Price Transparency
The cost of delivering funds internationally is actually also less via physical channels than digital channels. While I thought that the wire from my bank would cost $40—already a huge amount to begin with—the wire actually ended up costing a whopping $100! The package cost me just $25 to send. Even worse—in wire transactions, each party that touches the money charges their own fees to handle the money. Those fees are usually not surfaced to the consumer.
This is what happened:
So in the originating bank charges a fee to the sender ($25 in this case), but the receiving bank also charges a fee and charges to convert the currency. The fee that is surfaced to you is just the sending fee; the receiving fee and currency conversion fx, which is never the market rate, are hidden from you when you start the process.
Transferwise noticed how outrageous it was to transfer money between banks and created a completely transparent way to send funds. Transferwise connects two banks together and has ledgers on both sides so that it costs them almost no money to move the funds. By matching the flows between people trying to send money from US to Mexico and someone from Mexico to the US, Transferwise can process transactions locally at an average of 1% per transaction, which translates to a fee of about $30 USD for a $3000 USD transaction.
One of the most dramatic differences in my experience of sending the wire and the package was the ability to know where my money/package was at any point in time.
When my wire was not received as expected, I didn’t have a clue of where our money was. I even called customer service, and the answer I got was, “We have the confirmation that the wire was sent, there is nothing else I can do.” In many cases your money can be lost for weeks since the originating bank doesn’t have visibility on the corresponding or recipient bank.
UPS, on the other hand, allowed me to check the tracking number online to follow my package. If my package is not delivered because the address was wrong or because nobody was home to receive it, I get notified instantly via SMS. I am able to correct the destination address while the package is already on route if I notice any mistakes along the way.
This is the information I got for tracking my package:
In the international transfer world, if some information on your wire is wrong, you’re screwed. Your wire will be lost for at least a week until it is refunded. You will need to start the whole process all over again and pay again for a new wire. There no concept of tracking—the only way you know you have received the funds is when the recipient magically finds their funds in their account.
There are proposals to fix all of this, but the best solution would be to just create the infrastructure that is modern, fast, and provides transparency through and through.
Our friends at Ripple seem to be the most promising company with the capability to revolutionize the entire banking infrastructure. Ripple’s protocol provides a simple payment ledger that tracks accounts and balances in the system. The ledger contains a shared record of all the accounts and balances that power a real time settlement infrastructure with tracking capabilities.
But Ripple’s solution faces an uphill battle since in order for it to work, many partner banks need to embrace updating their infrastructure to the solutions provided by Ripple and other banking infrastructure companies. Most of them just don’t want to do it.
In the category of forms to complete the transaction, UPS wins again.
The first time I completed the form to send a wire I felt like I was back in college trying to solve my exam for Econ 101. Like my first Econ exam, I also failed my first wire transfer exam.
The number of forms required to send a wire is pretty insane. To send a wire, I had to fill out more than 30 different fields. In some cases they even asked information about the beneficiary bank that I could not even find for our own bank account!
The regulators for the banks to run an extensive list of reports and databases to comply with all the regulations both in the sender and receiving country. The list includes more than 10 reports such as: KYC, AML, SAR/CTR, OFAC, Threshold reporting, and many others.
In the UPS world, I also had to fill out forms. But while the UPS form was long, it was about half the size of a wire transfer form. To send a package you only need to share the address of the sender and recipient and categorize the contents of the package into a pre-set list of categories.
Start Stuffing Your Envelopes!
So there you have it, if you want to get your funds quickly to mom - don’t send an international wire, but rather, attach it to a pigeon! While sending money internationally via the banks is much worse than sending money in the mail many startups have innovated in the money transfer space by creating their own infrastructure rather than relying on the banks.
Venmo and Paypal all work via their own internal ledger to quickly transfer funds. Regalii, Transferwise and Xoom all keeps funds on both sides of a border so that they don’t need to send money between banks. At Regalii, prepaid balances even sit with the individual billers, so we don’t even need to get them from a bank to another bank to do a bill payout.
It would be amazing for the banks to improve the traceability, transparency and speed required to send money between borders but overall, it doesn’t seem to be a high on their list of priorities. Hopefully this will shift with time.