At the Bao Forum earlier this year, the People’s Bank of China governor Zhou Xiaochuan said that globalisation is a “reality for all countries and is not a matter of choice”, as he urged G20 finance ministers and central bankers to ensure their policies reflected this. Pankaj Ghemawat, professor at NYU Stern and IESE business schools, is not so sure. He argues that the world is “not nearly as globalised as people think” and told the Harvard Business Review: “I’ve been spending a fair amount of my time compiling simple metrics of globalisation. I ask people, for instance, of all the phone calls in the world, what percentage last year were accounted for by international phone calls? Turns out, the answer is about three per cent. Or I ask people questions about foreign direct investment; what percentage of all the investment going on in the world last year was accounted for by cross-border investment? The answer is less than 10 per cent.”
The challenges involved in banking and doing business across borders, of course, are not exclusive to governments or large international firms. At the most basic consumer level, people can be put off spending or sending money abroad by unfavourable exchange rates, domestic bank mark-ups or the slow processing times caused by legacy technologies.
TransferWise, a fintech venture committed to globalisation, was born out of frustration with the torpor of traditional banks, and their exploitation of customers. In 2011, Taavet Hinrikus, Skype’s first employee, and financial consultant Kristo Käärmann were Estonians living in London. Both found the hidden costs of transferring money between their native country and the United Kingdom punitive. Hinrikus worked for Skype in Estonia so was paid in euros; Käärmann worked in London but had a mortgage back home to pay in euros. As most UK banks charged a mark-up on the currencies’ exchange rate, which was not advertised, the pair were losing significant sums in a veiled commission.
In 2016, HSBC, formerly advertised as “The World’s Local Bank”, charged its customers £63.70 to change £1000 from sterling into euros. Halifax wasn’t much better, with a transfer cost of £42.50 on the same sum. For Käärmann, this amounted to “an extra tax”, on the men’s monthly salaries; but out of this problem, they found a solution. He explains: “Taavet and I came up with a simple scheme. Each month we checked that day’s mid-market rate on Reuters to find a fair exchange. I put pounds into Taavet’s UK bank account, and he topped up my euro account with euros.” As a result, Hinrikus was having his living costs paid in London and Käärmann was having his mortgage paid at home. “We both got what we needed, and neither of us paid anything in hidden bank charges.”
TransferWise now serves 61 different countries with exchanges between 41 currencies with its Borderless account, which is accessible both through an app and the company’s website. Borderless does charge a “small and transparent fee” on each currency conversion, of between 0.5 and 2 per cent depending on the locations involved. The “clever part”, Käärmann says, is that Borderless doesn’t actually need to see money leave its country of origin to be transferred. “TransferWise has accounts all over the world, linked together by our smart technology. If you want to send pounds to France, simply log on and send pounds to TransferWise’s UK account. Then TransferWise’s French account sends euros to the recipient. The money never actually leaves the country it started in.”
When TransferWise began, Brexit would have represented little more than an elaborate typo. Six years on, the UK’s decision to leave the European Union is a curveball which most businesses will have to deal with. Do fintech services such as Borderless represent an opportunity for UK-based companies to remain competitive on the continent? Käärmann says borderless accounts will “make it more convenient for people who make these transfers more often, for example a Swedish furniture maker”.
He continues: “What they would normally do when they sell in another country is make an invoice to a foreign warehouse, or whoever sells their tables and chairs. They would put their Swedish account number on it. They would charge them in Swedish Krona. There is the supplier, or re-seller, getting the invoice with the Swedish account number and invoicing them in Krona. What they would do is go to a bank in the other country and do an international wire. What the Borderless account allows them to do, is to start invoicing in local currency instead.”
Philipp Paech, assistant professor of financial law at the London School of Economics, says many attempts at borderless banking will be hampered by the regulatory environment. He explains: “In practical terms, borderless banking can happen for sure, at least when it comes to transferring money for holidays or whatever. But in legal terms, it’s impossible. As long as we work on the basis of territory, then rules and regulations are going to be different in different countries.”
There is also the question of tax. How can we be sure that UK businesses won’t use fintech companies such as TransferWise to circumvent regulation by basing themselves in countries with more favourable tax rates? Käärmann counters: “That’s more of a question for the taxman himself. People are taxed where their business is based physically. As for abusing something, at TransferWise we have 100 people working on preventing tax evasion and anti-money laundering schemes.”
Perhaps the most significant bulwark to borderless banking, however, remains undecided. The “passport” rules between banks – which allow free trade between any firms in an EU or EEA state – will be revised, and most likely removed, post-Brexit. Paech says: “After Brexit, the UK won’t have a European passport for financial services, which it does have now. At the moment, UK fintech companies can provide their services across Europe without any additional authorisation from other countries, or if they do need some then it isn’t very much. If a fintech company decides to stay in the UK and the Brexit terms aren’t great, then they’re going to need a second lot of authorisation from each EU country. That could be a lot more work.”
Lucian Morris, the UK head of fintech at Deloitte, suggests that whether banking can really be borderless depends on two things: fintech’s ability to actively encourage a step change in traditional bank behaviour and the eventual demise of cash. While bank-bashing might be in vogue, Morris points out that banks still represent the status quo. He says: “It’s clear that people don’t like their banking relationships, but when you look at the rate of current-account switching, it’s actually quite low. Various aspects of banks’ services might be under threat, but when you’ve already got that large-scale presence from years of being the incumbent, you’ve got time on your hands. Fintech still needs to work on getting better mass adoption.”
Achieving that, though, Morris feels is definitely possible and he credits people craving convenience as the core reason for his optimism. “We are heading towards a cashless society,” he continues, “and that’s because people want to be able to pay in real time. Contactless is already a step towards that. As we go cashless, fintech companies are going to be able to offer a market rate plus a small fee. That sort of thing, I expect, is where you’ll see the borderless movement of fintech really take off. What do we even mean by borderless? There are two tracts. One means sending or using money wherever you are in the world. The other means being able to have a local account in more than one place. You can create accounts remotely with fintech and you don’t need a physical address anymore.”
Ultimately, then, it would seem that borderless banking is possible – the technology is becoming increasingly available – but there are barriers to adoption which need to be overcome. Considering the prospect of increased protectionism post-Brexit, the business case appears clear; but it is the growing culture of convenience, as Morris notes, that may be what really turns the tide.