When Hank Uberoi said goodbye to a long and lucrative career on Wall Street in 2004, he could have retired to a life of investing in ventures he loved and tending his 20,000-bottle wine collection. Instead, he’s working late nights and winging from continent to continent in a bid to transform one of the most vital functions in the world economy: the movement of money from one country to another.
Uberoi, 54, a former head of Goldman Sachs’s global technology systems, admits his quest is half-crazy, Bloomberg Markets magazine will report in its May issue. For almost four decades, the crossborder payments system has been controlled by SWIFT, shorthand for the Society for Worldwide Interbank Financial Telecommunication, a nonprofit cooperative of 10,800 banks.
Uberoi is the CEO and top individual stockholder of Earthport, a London-based company that’s built a cloud-based alternative payments network. It recorded only $11 million in sales—and zero profit—in its last fiscal year. And yet Uberoi is betting that his tiny enterprise can rewire a machine that circulates about $21 trillion annually to every corner of the globe.
“At first I felt like I was suffering from temporary insanity, but in a 30-year career, I’ve never seen an opportunity this large,” says Uberoi, a speed-talking plug of a man who’s so busy these days he doesn’t even bother to keep a desk. Uberoi says big banks have done little to reboot an international payments system that’s as outdated as eight-track tapes.
Today, money moves around the world through a network of thousands of correspondent banks in which a single crossborder payment can ricochet through as many as five different institutions. Each one takes a bite out of the transfer in fees or from exchanging currencies, and each decides how and when to transmit the money along the way.
SWIFT, founded in 1973, is responsible for bringing order to this process, but it suffers from a fundamental flaw. It acts like an air-traffic controller for overseas transactions by directing them to their destinations. But it doesn’t actually move money. SWIFT is just a messaging system that banks use to tell each other where to send cash.
This decentralized approach is fraught with inefficiencies such as misdirected transfers and delays.
“It’s an absolute mess,” says Erin McCune, a consultant at Glenbrook Partners, a firm in Menlo Park, California, that analyzes the global payments industry.
Even so, it constitutes the global economy’s financial bloodstream. Multinationals such as Airbus and General Electric send trillions through the correspondent banking system every day to their suppliers around the world. Migrant workers use it to wire money home to their families.
This cash flow grows every year: Crossborder e-commerce alone is projected to triple to $900 billion in 2020, and remittances are now a $500 billion annual business, according to the World Bank.
“It’s ironic that we can send a physical package from one part of the world to another faster, cheaper, and with more transparency than money,” Uberoi says over a curry lunch at an Indian eatery next door to Earthport’s offices in the City of London.
“We saw a need to create a FedEx for money,” he continues, “but it was going to be difficult. Banks are highly regulated, they are risk averse, and moving money is a mission-critical function for them. We came to market offering a solution in 2011, and banks looked at it and said, ‘You’re crazy! Here you are, this money-losing company, telling me I can do payments differently? Forget it!’”
Uberoi didn’t forget it, and four years later, his persistence is paying off. Bank of America, the World Bank, HSBC, Standard Chartered, Banco do Brasil, Western Union, and even SWIFT itself are among the institutions that have tapped Earthport to help them deliver their clients’ cash to more than 60 countries in 120 currencies.
Shares in Earthport, which charges banks transaction fees, soared 89 percent in the 24 months ended on March 16, closing at 42 pence. Its market is growing: Worldwide revenues from processing crossborder payments have been climbing at an 11 percent annual clip since 2010 and will hit $77.4 billion in 2020, according to a forecast by Boston Consulting Group.
There was a time when investors couldn’t have cared less about the inner workings of the global payments infrastructure. Suddenly, this arcane business has become one of the hottest spaces in fintech, the surge in digital innovation that’s thrown banking into flux.
The cloud-based connectivity of the Web is ideally suited to blowing away the inefficiencies of the aging correspondent banking system, says Jan Hammer, a partner at Index Ventures in London.
Players such as PayPal, Visa, and MasterCard are racing to leapfrog the old model. In December, Adyen, an Amsterdam-based company that processes international payments for Facebook and Airbnb in lieu of banks, raised $250 million in venture funding from Index and other investors.
“It’s plumbing, but the payments market has opened up, and its size could not be larger,” Hammer says.
Wim Raymaekers, SWIFT’s head of banking, says that the time has come for fundamental change. He says the organization, which operates a software and design lab at its headquarters near Brussels, is taking steps to improve efficiency. In Australia, SWIFT is working with local banks on a A$1 billion ($774 million) project to enable customers to send and receive domestic payments instantaneously.
“Globalization has put pressure on the traditional model, and wire transfers don’t meet all the needs anymore,” Raymaekers says.
Uberoi has elbowed his way into this market by making nice with the banks, not bypassing them. Having learned the culture of global finance at Goldman, he says, he knew there was scant chance the industry, with SWIFT in existence, would ever muster the consensus to replace correspondent banking with a more efficient system. So he decided to do it for them.
“Hank put himself squarely in the middle of that problem and said, ‘Look, I’ll build the connection, and the more banks that participate, the lower the cost,’” says Ather Williams, who moves $1 trillion a day as the head of global payments at Bank of America Merrill Lynch. “And our clients really don’t care whose network I’m using as long as I guarantee the payment is going to get there.”
Still, Earthport’s momentum could fizzle if its banking partners fail to pump serious transaction volume through its system. The firm faces a crucial test as it sets out to grow its top line—“exponentially,” Uberoi says—over the next 36 months.
“It’s very hard for Earthport to forecast when these tie-ups are going to start producing revenue and how quickly they’ll ramp up,” says Rob Giles, a senior portfolio manager at Henderson Global Investors, which holds a 7.7 percent stake in the firm’s shares. “But if Earthport can build the pipes that run the banks’ crossborder payments, then it’s going to be one of the winners in this space.”
For a tech geek, Uberoi, who splits his time between London and his family home in Montclair, New Jersey, exudes the hustle of a salesman. He peppers his conversation with biz school lingo—a deal is a “win-win-win,” an obstacle is a “pain point.”
In February, he joined a delegation of business executives that accompanied U.S. President Barack Obama to India. Uberoi took a side trip to pitch Indian banking officials on the idea of using Earthport as a nationwide payments connection to outside markets.
“It’s a long shot, but we have to go after large pools of transactions,” he says.
Taking big chances is right in character for Uberoi. He was born in India, the son of an army officer. At the age of 17, he heard two wealthy classmates chatting about enrolling in American universities. Curious, he sent off some applications and received a scholarship from Williams College, a highly selective liberal arts school in Massachusetts, where he studied computer science and physics.
Following his 1985 graduation, Uberoi was set to pursue a Ph.D. in computer science when he met a Morgan Stanley recruiter at a job fair. The era of computerized trading was dawning on the Street, and the investment bank was hunting for tech guys. Uberoi spent three years at Morgan Stanley before jumping to Goldman in 1988.
The firm dispatched him to Tokyo to help build a business in Japanese equity warrants. As he worked with traders to install systems so the desk could sell, trade, and make markets in the securities, he was immersed in the engineering that undergirds the capital markets.
By 1998, Uberoi was back in New York as co–chief operating officer of the firm’s global tech operations and on his way to becoming a partner. He joined Kenneth Griffin’s Citadel hedge fund firm as COO in 2002 and ran its long-short desk, legal compliance, and risk management units, even its human resources department.
Uberoi was unwilling to move his family from New Jersey to Citadel’s home base in Chicago, so he quit two years later and, with “several tens of millions of dollars” of his own cash, formed HU Investments, an angel fund.
In 2008, he heard about a company with a sci-fi name that was trying to create an alternative international payments network. Earthport was co-founded by two entrepreneurs in London in 1997 as a website that processed payments for lottery tickets issued by the fundraising arm of the British Red Cross. It went public in 2001 in London.
By the time Uberoi came along, Earthport had built an e-wallet that enabled users to make international credit card and cash transactions through its website.
As Earthport announced deals with money transfer firms in Latin America and the Middle East to extend its reach, its stock jumped 205 percent from June 30, 2007, to June 30, 2008. Bullish on Earthport’s prospects, Uberoi amassed $5 million worth of the company’s shares on London’s AIM exchange.
By late 2009, Earthport’s fortunes were cratering as it failed to convert its grand strategy into actual sales, says Henderson’s Giles, who at that time was shorting the company’s shares. Losses piled up, and Earthport’s market value plunged 75 percent.
“Management was very good at promoting the company, but when you looked under the bonnet, there wasn’t a lot there,” says Giles, who reaped an 85 percent return for his clients by betting against Earthport that year.
Uberoi hadn’t been as prescient.
“It was embarrassing; I felt hoodwinked,” he says. “But I still liked the concept.”
So in February 2010, Uberoi took the helm as the company’s executive director. He declined a salary, retired the company debt of £1 million ($1.5 million), and recapitalized Earthport by selling £11 million in new shares. Then, he started designing a turnaround plan.
“I thought it would take six to 12 months,” he says.
Five years later, Uberoi is CEO, and Earthport’s hub-and-spoke model is a viable alternative to the existing order. When a crossborder payment begins its journey in this scheme, a bank hands it off to Earthport, which delivers the money to its destination for less than $5.
By comparison, wire transfers between correspondent banks cost from $5 on average to more than $50, plus 0.25 to 3 percent charges for handling the foreign-exchange conversion and landing fees ranging up to $20.
Earthport will also provide foreign-exchange trading and, for an extra fee, “pre-position” money in markets where clients send regular transactions. The firm can track the payment throughout its journey. It says its error rate on transfers is 0.1 percent, compared with a 4 percent average under existing methods.
Now, Earthport must demonstrate to investors that banks will indeed move billions of dollars through its shiny new network. It’s off to a good start. The firm’s sales vaulted 172 percent during the second half of 2014.
Uberoi must continue to win over customers. Banks are hesitant to entrust outside firms with their clients’ cash, and it can take them one to two years of due diligence to reach a deal, Uberoi says. Moreover, should SWIFT or the banks move to replicate Uberoi’s model, that could also hamper Earthport’s growth prospects.
These challenges are very much on Uberoi’s mind as he takes the floor to address Earthport’s 185 employees in an all-hands meeting on a crisp London February afternoon.
“When we first started off, it was an idea,” he tells them. “Then we learned the hard way over the next two years that the product needed a lot of work. But now we have established credibility with our banking partners, and with ourselves. Now, we have to ask, ‘How do we exponentially accelerate our growth?’ We are at a turning point. That’s the good news. The other good news? If you thought we were working hard, well, we’re going to be working even harder. We’re not going after one client in one geography. We want to go after 30. We want to go after 50.”
Uberoi is raring to go. He has $7 million of his own cash and years of toil invested in this company. As he dashes for a crossborder payments confab across town, he can’t hide his grin. For five years, he’s been waiting for this moment. He and his team have built their machine. Now, it just needs to kick into gear.