Undermining the Banking Monopoly: Covercy Raises US $1.5 Million

Published by Calcalist

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Covercy offers money-transferring services between different countries for small and medium-sized businesses and charges significantly lower commissions than the large banks. The company does this by using local bank accounts and a risk-management mechanism that hedges the foreign currency exposure.

Transferring money from one account to a foreign account was always considered to be expensive for businesses to do and exclusively designated for the wealthy. Private clients almost never used this kind of service, and it is usually used by companies, especially large ones. This, at least, was the excuse of the banks to charge high commissions of tens of percents for each money transfer from an account in one country to another. But in a world in which small and medium-sized businesses are required to be global, commissions on transfers and conversions have become fixed elements in the overall costs of living, which emphasizes even more the banks’ monopolies.

Doron Cohen, serial FinTech entrepreneur, gives as an example a business that needs to transfer 1000 euros from Germany to England. In this instance, it is 724 pounds, of which the bank takes a conversion commission of 2 pounds, another 8 pounds’ commission for the difference in rates, 15 pounds for a clearing commission for the global Swift network, 7 pounds for the bank commission – meaning, a bank that acts as a middleman or agent between banks that can’t transfer between themselves directly, and another local commission of 10 pounds per local transfer within the destination country. Forty-two pounds out of 720 pounds is more than 5% of 1000 euros. And as the amount increases, so too does the commission, even reaching the range of 10-30% of the overall amount of the transfer.

Although only a few of us transfer large amounts of money between banks abroad, the majority of the world’s capital is transferred through bank transfers and not through credit transactions, as you might think. This comes to US$29 trillion a year, of which 85% is controlled by banks.

A new Israeli startup, Covercy, seeks to integrate into the smaller money-transfer market, which characterizes smaller and medium-sized businesses and offers them protection against the monstrous commissions of the banks. Cohen thinks that due to their sheer size, it is hard for banks to serve small businesses.

Covercy is focused on commercial bank transfers, meaning transfers to or from businesses. This avoids the gray area of transfers between private individuals, an area that invites money laundering, and focuses on businesses, like transferring salaries or purchases of products and raw materials from suppliers. Recently, after developing the product, Covercy raised US$1.5 million from the SGVC fund, the new US$50 million fund of Dovi Frances, which is based on wealthy families in America. Together with SGVC, British investors Errol Rudnick and Aviv Leshem, the owners of Telmil Electronics, have also invested in Covercy. Today, Covercy employs eight workers in the start-up area MindSpace, on Ehad Ha’Am Street, which, in a symbolic way, used to be the Stock Exchange in Tel Aviv.

Left to right: Gonen Tiberg, Boaz Zaionce and Doron Cohen. Covercy Founders.

Transferring money through the Covercy website is similar to transferring files: you upload the amount that you want to transfer; you fill in the personal details; you add the email address of the recipient; using your smartphone, you scan several identification documents; and you send the money amount that will arrive to the other account within six minutes for the first transaction and within three minutes for the second transaction. Cohen claims that the conversion rate will always be more attractive than what the banks will offer, and the overall conversion commission will never exceed one percent of the total business transaction, compared to the average of 3-8% at banks.

So how does Covercy do it? Herein lies Covercy’s small war against the monopolies. Covercy skips, as much as it can, the Swift network, which is the registered network of bank transfers that is, by itself, a monopoly owned by the largest banks in America. This network is where the majority of the bank transfers in the world are registered. The 40-year-old Swift monopoly is expressed in the commission that it takes out of each transfer, and also by diverting the transfers to mediator banks and middlemen, which also take fat commissions.

When Covercy skips over the Swift network, this is where the system of direct transfers from one account to another lies, which is actually done through credit and conversion. In actuality, Covercy is not transferring money from one country to another but is active within each country through local bank accounts that are opened in Israel, Germany and the United Kingdom. For example, when a company is interested in sending money to an employee in the United Kingdom, Covercy charges the company’s Israeli account in shekels and credits the recipient employee in pounds from the account in the UK.

The company is counting on constant movement of transactions and assumes that at any given moment it will be able to accumulate in its accounts in Germany, for example, a suitable amount of euros that will allow it to carry out transactions. As such, the uniqueness of Covercy in the world of money transferring is in the mechanism of risk management, hedging the exposure of foreign currency, which allows it to offer a comparatively attractive rate by minimizing the risk and relying on purchasing currency only when there is a shortage. And, when there is demand, Cohen does not hesitate to buy currency from the bank at relatively comfortable rates.

Doron Cohen, Covercy.

Cohen does not hesitate to work with the banks despite the fact that the model that the company is developing is undermining their model. “The banks understand that these processes are happening, no matter what they will do. Therefore, the wise ones intend to be part of the FinTech revolution and want us to work with them, even though they would prefer that this technology would not exist in the first place.”

Covercy is active in a crowded market of companies that are dealing with different technologies to transfer money and is competing with British companies Worldfirst and Azimo. The most famous Israeli company that transfers money is Payoneer of entrepreneur Yuval Tal, which is targeted at companies that carry out mass transfers at once, for example, salary payments to employees in foreign countries. Covercy is different from them in that it allows individual transfer at a relatively low price between a person and business or between a business and a person. Among its clients are Israeli food importers that use it to pay European suppliers, travel agents that pay their partners in destination countries, hi-tech companies that pay foreign manpower agencies or British attorneys, shops on Amazon.com that sell in China, or real estate investors in America.

Within the company, they are limited to transactions ranging from US$100 to a few hundreds of thousand dollars, the largest of which, up until now, was US$800,000. Covercy is capable of transferring even more than a million dollars.

Covercy was established by Doron Cohen, former CEO of Bright Trading platforms; Gonen Tiberg, former CTO of Triald; And Boaz Zaionce, former director of online advertising in Wix. The investor, SGVC fund, tends to invest in FinTech companies, like Tipalti, OpenGov, SoFi and Addapear – that were founded by John Lonsdale, founder of Flinter.