TransferWise is a financial technology company offering international money transfer services. Two Estonians, Kristo Käärmann and Taavet Hinrikus, founded the company in 2011 in London. By relying on a peer-to-peer business model, TransferWise has found a simple way to bypass traditional money transfer methods by charging many times lower fees. Currently it is doing more than $750 million worth of transactions each month.

TransferWise launched in the U.S. in February 2014 and has completed more than $1 billion worth of transactions there. TransferWise charges about 1 percent on transactions in the U.S. It may seem high, but it is significantly lower than alternative options available for currency exchange for a typical customer. In addition, customers avoid hidden costs of currency exchange because TransferWise is charging mid-market rate. TransferWise U.S. customers can make transfers to more than 30 currencies.


An accidental idea

Obviously, the emergence of Internet banking and experience with business models utilizing peer-to-peer technology provided a potential springboard but were not sufficient for the founding of TransferWise. Many different causal factors are at play.

As with many other startups, the idea behind TransferWise was accidental. Both founders lived in London. Käärmann was paid in pounds but needed euros in his Estonian bank account to make regular mortgage payments. Hinrikus was paid in euros to his Estonian bank account but needed pounds to make payments in London. Thus, they made a private arrangement where Hinrikus would transfer euros to Käärmann’s account in Estonia and Käärmann would transfer pounds to Hinrikuses’s account in the U.K.

TransferWise is about scaling up this peer-to-peer money transfer method and making it global. The model of transferring money in this way is not new. For instance, the Hawala model of money transfer is about making payments without physically moving money. There have been many other examples in history where similar methods have been used. However, TransferWise has been able to bring such a business model online. This makes a radical difference.

An obvious advantage is cost. The Financial Times has pointed out that “With TransferWise, transferring £1000 into a euro account costs just £4.50 compared with more than £120 with Western Union and between £40 and £50 with many of the main consumer banks.”

I have used TransferWise for more than a year for regular monthly transfers between my bank in Estonia and my bank in the United States. My bank in Estonia used to charge me about 24 euros for any transfer in any amount. It was the Internet bank of a major retail bank. If I would have used an offline service, the fee would have been even higher. My U.S. bank used to charge an additional $20 for any incoming international transfer. So usually my individual transfer to the U.S. would cost me 24 euros plus $20. With TransferWise, it costs about 2-3 euros per transfer for me, depending on the amount to be transferred.

TransferWise payment is a domestic payment in the U.S. and thus my bank cannot charge me an “incoming international wire fee.”

In addition to the cost advantage, TransferWise is much faster than regular banks. My experience suggests that usually regular retail banks use 2-3 days to transfer money from Estonia to the United States. TransferWise usually promises to make it in two or three days, but most of the time it has happened within 24 hours. This is about the same time it takes for me to transfer money between my different accounts within the same U.S. bank.
Considering these advantages, it is clear that TransferWise and similar ventures have strong future potential to revolutionize the business of international transfers – as long as these processes of entrepreneurial discovery and creative destruction are not constrained by excessive government regulation.

TransferWise has been backed by well-known investors such as PayPal founder Peter Thiel, Silicon Valley venture capital firm Andreessen Horowitz and U.K. billionaire Richard Branson. British investment firm GP Bullhound has classified TransferWise among the European billion-dollar technology companies founded since 2000

The following sections will discuss some of the key factors that have influenced the birth of TransferWise. In a way, it is not surprising that TransferWise was founded by two Estonians in London.  Most important Internet innovations in Estonia have been either about financial services or rely on peer-to-peer technology. TransferWise combines both of them.


Internet banking

Some of the key drivers of information technology innovation in Estonia have been retail banks.  The open economic regime and sound financial policies benefited the birth of innovative banks, which introduced Internet banking in 1996.

New Estonian banks in the 1990s were effectively startups because there were no old legacy banks. The Soviet banking system was undeveloped. To a great extent it was a cash-based system. The use of checks was not widespread. Hence, it was possible to start from a blank sheet and avoid the same development trajectories that were experienced by more advanced countries. This provided a critical juncture because Estonian banks did not have to deal with legacy costs and path-dependencies of old banking systems.

It was possible to move from a cash-based system to Internet banking without ever introducing checks and other old technologies.  A typical bank in the West, such as Bank of America, has essentially made its checkbook-based system electronic and calls it Internet banking.  Estonian banking, from the beginning, was true Internet banking with superior speed and quality of service. Transfers could be made within the same day, often within a few hours, instead of waiting at least 24 hours. It was cheap, as most consumers using the service did not even qualify for credit cards back in 1996.

In 2005, 35 percent of Estonian people used Internet banking. By 2013, the use of Internet banking was almost universal among Internet users as it reached 73 percent of total population.  As the figure below shows, Estonia’s lead in Internet banking is exceptional among the Central and Eastern European countries that joined the EU in 2004 and 2007, as well as in comparison with the EU average. I have made comparison with other former socialist countries because they share a similar economic and political legacy with Estonia.

In 2004, the use of Internet banking in Slovenia – with the highest per capita GDP among the former socialist countries – was four times smaller than in Estonia, and in 2013 it was almost 2.5 times smaller.  On average, slightly more than 40 percent of people use internet banking in the EU.  Only 4-5 percent of people used Internet banking in Romania and Bulgaria in 2013.

The widespread use of Internet banking in Estonia is also supported by data from  on top websites in Estonia. In 2015, the website of the largest bank by market share in Estonia,, was ranked 8th, and second-largest bank was ranked 16th among top websites. The government portal, a gateway to different government online services, was ranked 113th among top sites in Estonia. At the same time, for the websites of smaller banks, was ranked 62 and was ranked 110. In other words, even small banks beat the government central portal in attracting users. See figure 1
Building on the experience of Kazaa and Skype

Another important connection between TransferWise and Estonia is Skype. One of the two founders – Taavet Hinrikus – was the first employee of Skype. Both TransferWise and Skype rely on peer-to-peer technology. Essentially, TransferWise is disrupting business models in international financial transfers in the same way that Skype disrupted international telecommunications.

Skype was founded by Niklas Zennström, Janus Friis, Jaan Tallinn, Priit Kasesalu, Ahti Heinla and Toivo Annus in Tallinn, Estonia, in 2003. Skype was acquired by eBay for $2.6 billion in 2005 (Skype Technologies 2009). In 2009, ebay sold 65 percent of Skype to venture capital firms Andreessen Horowitz, Silver Lake and Canadian Investment Plan Pension Board for $1.9 billion, valuing the company at $2.75 billion. Microsoft acquired Skype for $8.5 billion in 2011.

In 2015, Skype was listed by U.K. investment banking group GP Bullhound as the most valuable European technology company in Europe in the so-called billion-dollar club. Skype’s valuation at $8.5 billion exceeds considerably this “club’s” average of $3 billion. TransferWise was also included in the list with a valuation slightly exceeding $1 billion.

Two core founders of Skype, Zennström and Friis, moved to Estonia from Sweden and Denmark, respectively, in the 1990s. They placed an ad in English in an Estonian newspaper in 1999 with a catchy slogan: “Supermodels not wanted. We want your brain” (Kitsing 2005). This ad attracted several Estonian programmers with whom Zennström and Friis created a portal called, which no longer exists. This was followed by peer-to-peer (P2P) file-sharing company Kazaa in 2000, which made them famous and fugitive together with Estonian programmers from the U.S. legal system. Kazaa was actually developed first by Jaan Tallinn and other programmers and then sold to Zennström and Friis.

In 2001, Kazaa was sold to Australia-based Sharman Networks in order to avoid lawsuits by the U.S.-based music and movie industry (Pasick 2006). Zennstöm, Friis, Kasesalu and Tallinn could not travel to the United States and for years had to avoid situations where they could be served legal papers. In 2003, Kazaa was the most downloadeded computer program in the world with 315 million copies residing in computers (Roth 2004).  However, once Skype founders made hundreds of millions for selling Skype to eBay, they also settled lawsuits with the music industry by paying more than $100 million to music industry plaintiffs.

Similar to the birth of Internet banking, economic openness and Estonian government efforts in liberalizing the telecom market have contributed to birth of Skype. Perspectives on startup communities, entrepreneurial ecosystems and creative classes (Florida 2005) emphasize the process of entrepreneurial discovery in innovation. These approaches emphasize the role of entrepreneurs and their agency in ecosystems and de-emphasize the role of old-fashioned top-down government policy in shaping the diffusion of technologies. The early years of Skype fit particularly well with these perspectives.


Peer-to-peer business models

Technologically, Kazaa, Skype and TransferWise have obvious connections as these businesses rely on peer-to-peer technology. Entrepreneurs behind these ventures have been good at turning earlier inventions into innovation and building entire business models around it. Peer-to-peer technology creates important technological advantages compared to the traditional server-client model. The directory is entirely decentralized and distributed among network nodes. This in turn implies that the venture can increase its scale rapidly without added investment for expensive and centralized infrastructure. Essentially, it is about exploiting the decentralized nature of the Internet.

This technological aspect explains why such business models are economically superior to server-client models. Economic superiority has a tremendous effect on the competitive rivalry and it means a lower cost structure on the supply side, thereby enabling lower prices on the demand side. It is also easier to scale users because the necessity to invest in additional infrastructure for accommodating new users is significantly smaller in comparison with centralized models. These technological and economic advantages allow such ventures to grow rapidly.

In the beginning Skype grew rapidly in Estonia; their main engineering and development center is still based in Tallinn. However, after initial growth in Estonia, most of the expansion took place in other locations. Skype employs over 400 workers in Tallinn. As the main development center of TransferWise is in Tallinn, they have increasingly been targeting Skype employees – even staging a playful demonstration in the front of the Skype office in Tallinn.

Even though TransferWise was founded in London, about 300 people – about 80 percent of the total workforce – are now working at the TransferWise office in Tallinn. In addition to the headquarters in London, the company has offices in New York and Tampa.



Considering these advantages, it is clear that TransferWise and similar ventures have strong future potential to revolutionize the business of international transfers – as long as these processes of entrepreneurial discovery and creative destruction are not constrained by excessive government regulation. TransferWise investors such as Peter Thiel, Richard Branson, Andreessen Horowitz and others seem to have a strong belief in this business model as the valuation of TransferWise exceeds 1 billion euros. This places TransferWise among so-called unicorns, an elite group of European technology companies.

Certainly, as TransferWise is still in the early years of business development, it is too early to tell whether such high valuation is based on overestimation. It will be clear once early stage investors exit. However, many building blocks for its continued success are already in place.