Musings about Remittances

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What with all the interest, VC investments and PR around the remittances business in the past 5 years, I decided to pore over the Q1 2015 financial results of Western Union, MoneyGram and Xoom. I will use Xoom as a proxy for all other startups that are vying to disrupt the space.

I have been pitched too many times by remittances businesses not to know the story by heart: “The incumbents extort exorbitant amounts of money via ridiculously high fees, plus they have brick and mortar operations which means their operating costs are way too high and sticky.  So I, startup remitzen will disrupt the ecosystem by being purely digital, offering lower fees and grabbing market share.  Easy as pie I say.”

Except the remittance business is not as easy to disrupt as that. As Ron Shevlin told me once over the phone, “it is not about cost, it is about consistency, dependability and ease of mind”. In other words someone sending money to a family member across the globe wants to make sure nothing wrong will happen first and foremost. Making that someone change service provider will take time, care, tender care, education and loads of patience.

As a result we never invested in a remittance startup at R66. We did look a tad more carefully at a bevy of mobile – as opposed to online –  remittance businesses and were very close to invest.  Eventually our nagging feelings around customer stickiness and behavioral anchors was too much and we declined.

So, onto the Q1 2105 results: Western Union (WU) is doing very well indeed, thank you very much. Up to now, it does not seem to be worried or bothered by the upstarts. Revenue and margins are doing well. No material downward pressure. Revenue from “electronic channels” makes 7% of total revenue – I use WU’s words. MoneyGram (MG) is not doing so well, most due to the loss of its partnership with Walmart – which decided to directly compete in the remittance business instead of partnering. MG’s revenue from “electronic channels” makes 11% of total revenue. Xoom obviously makes 100% of its revenue from “electronic channels” or $44m for Q1 2015. To be noted, WU’s Q1 2015 revenue was over $1.3b which means revenue from “electronic channels” amounted to $91m or more than twice that of Xoom from the same channel.

Based on size differential, customer stickiness and behavioral expectations, is it rational to think the remittance disruptors will overtake WU? It should be noted that in the last 3 years, remittance fees have on average decreased from +12% to -9%, presumably preemptive and competitive moves from the likes of WU, and yet financial results are not negatively impacted.

The lesson here is if, as a fintech disruptor, you compete against an incumbent that operates sharply and has its act together, in an industry where customers had not clamored for another solution, you will have a very difficult time grabbing significant market share.  Note that MG is not the sharp competitor, WU is.  I fully expect MG to be either bought by WU or another corporate or start suffering real declines, in favor of Walmart or fintech disruptors. I also fully expect WU to purchase a fintech disruptor to jumpstart its digital channels before it feels any pain at all, thereby making it even more difficult for Xoom and its followers to compete, unless they are the ones being acquired.

One last thought: What of a crypto or bitcoin model? Will such model be more effective at disrupting the space? If so why?  Several crypto startups are eying the space: Abra (USA), Rebit (Philippines), Artabit (Indonesia), Bitpesa (UK), Bitspark (HK), Hellobit (Mexico), Satoshi Tango (Argentina) are but a few I have come across.

Xoom and its cohorts came about in a world that had not gone mobile yet and where mobile had not gone social network and where mobile social network applications had not declared their interest to embed payments. Going out on a limb I predict a bitcoin or crypto remittance model will succeed in disrupting the space, if and only if a) it successfully partners with mobile social network apps, b) navigates regulatory issues shrewdly and c) try delivers a low cost solution – the convenience vector comes with mobile usage i think.

IMHO, the only thing that keeps WU executives up at night is not digital/online/electronic channels. It is MOBILE.





Pascal Bouvier

Life and work experiences have given Pascal an unmatched vantage point, seeing things as both venture capitalist and aspiring entrepreneur. He currently is a Venture Partner with Santander Innoventures – Santander Group’s Global Fintech fund.

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