Category Archives: Finance

Financial Innovation

Recently I came across a couple of new peer-to-peer financial startups. With people feeling distrust towards mainstream banks in the wake of the financial crisis, it is likely that many of these financial startups will get a lot more attention in the near future. Here are two startups from my own home country, Estonia, which have been making headlines recently.


One such startup is Transferwise, the peer-to-peer online currency exchange from the creators of Skype and PayPal. The idea of this is to allow cheaper exchange of money between different currencies, by using the Reuters mid-market rate. It therefore offers a better rate then high street banks by taking the real currency value, in between the bid and offer price. At the same time, it is able to offer far lower service fees due to its limited overhead costs.

The way in which this works is as follows. For example, at any one time there might be one person who holds euros and wishes to purchase British pounds. At the same time, there is likely to be someone else who holds British pounds but wishes to purchase euros. Usually these two individuals would simply turn to a bank, buying at one rate, selling at another and incurring a transfer fee on top of the exchange rate loss. However, with Transferwise, the first individual holding pounds instead transfers these into the UK account of the second individual wishing to purchase pounds. The second individual holding euros then transfers these into the euro account of the first individual. The whole process is done via Transferwise accounts meaning that the money transfer is completed once both parties have sent their money in.

This process is best shown in Transferwise’s introductory video:

The only thing that now remains to be seen is whether this will be a knockout blow to high street banks or simply a “black eye”, as reffered to by The Economist.


The second financial startup that I came across was isePankur. This is another peer-to-peer innovation that cuts out the spread used by banks to make money. In this case, it does so by cutting out the difference in interest rates for savings and loans.

The way in which it works is that people looking to borrow money post their loan requirements on the service’s website. isePankur then verifies all of the borrowers’ information, analyses their bank statements and performs various other checks, just as any commercial bank would do. Individuals looking to invest, then loan their money, spreading the investment between multiple applicants. The loan applicant is able to borrow at exactly the same rate as the investor gets in returns, unlike at a commercial high street bank where both receive different rates.

Again, this service has been praised by many, including one of The Economist editors, Edward Lucas. Read his article on his own experiences with isePankur here.

So what does this mean?

Essentially, this shows that with modern technological capabilities, financial innovation is able to take various creative new approaches. Such peer-to-peer services are likely to have an impact on commercial banking activities, but only if they gain the trust of their customers. The benefit of having a commercial high street bank, is that it is a physical place which people feel secure about, as opposed to an online service which takes place in a cloud and could easily disappear at any moment. It remains to be seen how much of an impact these companies will have, but initial responses have been positive and many consumers are already beginning to take advantage of such financial innovations.

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