When I backpacked through Europe after college some forty years ago, I had two options if I needed money from my parents fast: go to an American Express office or a Western Union location. They were both expensive and unless you were in a large city, like London or Paris, it wasn’t convenient. I would like to say that it was my gap year (popularized by today’s students) but it was more like my gap-fortnight as 2 weeks was all I could afford!
These days, there are a plethora of options to receive money. In the money transfer segment—this article’s focus—seemingly hundreds of companies exist for the purpose of moving your money, or someone else’s, to you for a fee, of course. Most are safe, reputable and licensed. Regulatory scrutiny at both the state and federal level has increased dramatically since 2001, and while its focus has been on anti-terrorism, consumer protection laws remain very strong.
At a glance, to grasp the scope of this industry, certain metrics are important. The World Bank estimate $529 billion was sent from one person to another in 2013; this is primarily a consumer- to -consumer (C2C) business. Moreover, the post-recession increase is about 5% worldwide. The stereotype of the hiker stranded in Kathmandu, needing money to get home, only comprises a small portion of those funds. The evolution of migrant worker remittances (a worker sending money home to his family in another country), dominates the remittance landscape.
Remittance corridors emerge when people move from poor or distressed regions to wealthier or more developed areas. Of the largest corridors from the United States, some are well known like Mexico ($25b) and the rest of Latin America (another $20b). Perhaps less familiar are the Philippines ($6.5 billion), Guatemala ($5.3 billion) and Vietnam ($6.8 billion). Outside of the United States, the largest recipient countries are China ($64 billion) and India ($70 billion).
Traditionally, remittance businesses have utilized the “Agent” model. Companies work through retail locations, like supermarkets, drug stores, phone stores, etc. The customer enters that store to send money, which is online with the remittance firm’s system. The transaction is fast and once the money is paid, the transaction is usually available for pickup and the agent pockets a nice percentage of the fee for its commission.
Western Union, the grande dame of remittance firms, has been operating for more than 100 years. This legacy brand has built a reputation for safety, security and reliability. Its customer base is loyal, primarily because they have no reason to go anywhere else. Their hard-earned funds always make it home in good time. Sure, the fee might be less if they went somewhere else, but why risk it? Western Union can send money anywhere in the United States and to more than 200 countries and 500,000 locations worldwide.
A distant second in the remittance race is MoneyGram. Founded over 25 years ago, originally as part of American Express, the perennial runner-up has a strong global footprint. A customer can usually save money versus Western Union and can send money anywhere in the United States, plus to more than 200 countries with 350,000 locations globally.
An ambitious brand is competing to be in the same ranking as the perpetual top two. Ria Envios, owned by Euronet, was once a niche player with service to Latin America, now boasts a strong global network of send and receive locations. In addition, late last year it pulled off a coup: contracting with giant retailer Walmart to launch a U.S.-U.S. service, consequently thrusting itself into the US domestic discussion. As a result, the incumbent relationship holder, MoneyGram, suffered a significant loss of business.
For comparison purposes, let’s look at the revenue and agent network to get a relative sense of the size gap between the top three remittance brands:
|TOP THREE GLOBAL MONEY REMITTERS|
|BRAND||TRANSACTIONS (MM)||REVENUE (MM)*||NETWORK **|
|*2014 Full Year|
|** As of December 31, 2014|
|***MoneyGram transactions have been estimated|
As you can see, Western Union is three times the size of Money Gram and nine times the size of Ria; however, a dynasty they are not. Western Union has run into growth challenges the past few years; some wounds are self-inflicted, but sheer size can create a grow-over problem, and no one has faced that in the industry.
In addition to the Big Three, there are many mid-size regional remitters who provide service to many countries and numerous “niche” players, who typically focus on specific corridors e.g. United States to Mexico.
However, these traditional agent-based models are being threatened by the emergence of online or mobile remittance companies. Already, Xoom offers online service from anywhere in the US to a number of countries, but specializes in payouts to the Philippines, India and the Latin America market. Xoom is publicly traded and has reported fast growth and increasing profits over the past two years.
In addition, new online companies are joining the U.S. Market, including WorldRemit and TransferWise. Not to be outdone, Western Union and MoneyGram have also launched “self-service” offerings. In fact, Western Union generates more revenue from its online business (approximately $200MM in 2014 than Xoom’s total ($160MM). Furthermore, MoneyGram has a stated goal that 15-20% of its total revenue will be produced by self-service activity by 2017. At 30-35% annual growth in that segment, it appears they are on their way to achieving the target.
Lest the mainstays of the remittance business become too worried about the future, it is important to note that like most businesses the barriers to entry are quite imposing:
Even though remittance companies may not face an onslaught of new competitors, challenges to growth and profitability remain. Late last year, Xoom reported a $30 million loss due to fraudulent activity. In addition, the cost to acquire and retain repeat customers is increasing.
Moreover, the aforementioned regulatory requirements exact a significant portion of operating budget of a Money Service Business (MSB). Western Union saw its profit margin dip from 26% to 20% due to a $200MM+ investment in compliance monitoring worldwide. Money Gram recently cited a $50MM investment in staff and systems aimed at tracking, reporting and agent oversight.
Many companies believe that two objectives can be achieved by offering additional products and services:
Consequently, it is common to see remittance firms offering some combination of the following:
So, what do we see as the future for MSBs? After many years in this business, having seen a cycle of booming and not-so-booming times, the remittance industry will continue to evolve. As long as people are transitory, moving from one town, one city, one country, one region to another, looking for ways to improve the lifestyle of themselves and their family, there will be a need to transfer money from one person to another. Technology will evolve, compliance requirements will stiffen, funds will move faster and foreign exchange opportunities may shrink. Consolidation will occur as smaller firms have trouble with working capital, bank relationships, regulatory requirements or all three.
However, companies who can overcome the challenges and provide the level of service demanded by the large diversity of customer needs will thrive.
Rob Ayers brings his 25+ years of experience in the payments industry to the firm as Chief Commercial Officer. His experience in the world of global remittances has been cultivated with companies such as: Travelex, Coinstar and WorldRemit. Rob began his money transfer career in the late 1980’s as a key member of the MoneyGram launch team. Rob can be reached at RobAyers@chartwellcompliance.com.