Transfer of Power?

Upstarts armed with digital technology are rewiring the money-transfer business, but the time-tested agent model enjoys key advantages. The old and new just might meet in the middle.

In some respects, agent-based money-transfer providers are like what cash and checks were to an earlier generation of credit and debit card providers: old-fashioned, expensive payment options ripe for disruption.

Attracted by the needs of an estimated 247 million international migrants, according to an April World Bank report, to send money to family members back home, numerous online-only providers have rushed into the $500-billion-plus money-transfer market in recent years. They include Xoom Inc. and many startups based both in the U.S. and abroad.

Joining the fray now are young, digitally minded companies steeped in the worlds of Bitcoin and virtual currency, including Circle, Ripple, and others. All of these providers, including PayPal Inc., offer cross-border person-to-person payment services that compete for business that might have gone exclusively to agents in years past.

“Many, many companies are staking their fortunes on developing these products,” says David Landsman, executive director of the Great Neck, N.Y.-based National Money Transmitters Association Inc.

Body Blow

Meanwhile, the two leading agent-based money transmitters in the U.S., The Western Union Co. and MoneyGram International Inc., have been through some tough times in recent years. Despite increasing migration flows, the weak economies in many countries have limited their transaction growth. And both have been forced to cut domestic prices in the face of increasing competition.

MoneyGram absorbed a body blow when Wal-Mart Stores Inc. forged a deal last year with Euronet Worldwide Inc.’s Ria subsidiary that shifted most of Wal-Mart’s domestic store-to-store money transfers from MoneyGram to Ria. MoneyGram’s U.S.-to-U.S. transactions plunged 37% in 2015’s first quarter, actually an improvement from a 40% drop in 2014’s fourth quarter.

“The big change event was Wal-Mart partnering with Euronet,” says Brett Horn, a senior analyst who follows the money-transfer industry at Chicago-based independent investment research firm Morningstar Inc. “They really broke up that duopoly.”

The travails of the old guard were cast in stark relief in early May, when rumors circulated on Wall Street that Western Union was in early talks with Dallas-based MoneyGram about buying out its smaller rival. It seemed like a classic case of merging to reduce costs in a slow-growth industry.

But Englewood, Colo.-based Western Union broke with its usual policy of not commenting on market rumors to issue a brief statement saying the speculation, caused by a Bloomberg news report, was “not accurate.”

‘You Need an Agent Network’

Indeed, don’t count on Western Union or MoneyGram going the way of Studebaker, Zenith, or other defunct corporate giants, at least not yet. Both are working furiously to expand their digital offerings.

Even so, their hundreds of thousands of agent locations—500,000-plus in 200 countries and territories for Western Union and 349,000 for MoneyGram—remain particularly useful in many places where banks are scarce and PCs and mobile phones also are rare or unable to receive an electronic payment.

In its recent report about migration and remittances, the World Bank acknowledged that online and mobile money transfers are reducing remittance costs, and that some mobile money-transfer programs, such as M-Pesa, “have transformed the landscape for domestic remittances in several African countries.”

But mobile transfers accounted for less than 2%, or $10 billion, of the worldwide market in 2013, the report says.

Western Union’s worldwide market share was 17.6% in 2011, according to Boston-based Aite Group LLC, while MoneyGram was third with 3.7% (“Trying To Stay on Top,” January 2013) More recent reliable figures were unavailable.

“Scale is the critical source of competitive advantage,” says Horn. “It’s really conditions in the developing countries, which are the recipient markets, that limit options. It’s still cash out on the receive side, so you need an agent network.”

‘A Big Factor’

At the same time, the upstarts are now confronting the onus of government regulation, just as industry graybeards have been for decades. The scope of regulation can include getting money-transmitter licenses in nearly all the states, registering with the U.S. Treasury Department as a money-services business, and more.

With terrorism a worldwide concern, Treasury’s Financial Crimes Enforcement Network (FinCen) is constantly on the lookout for money laundering and demanding that banks and other financial providers know their customers.

Cryptocurrency provider Ripple Labs, whose platform enables cross-border money transfers, recently ran afoul of FinCen and the U.S. Department of Justice, mainly for what it did or didn’t do in its earliest days. In May, the feds announced a $700,000 civil penalty against Ripple and a settlement in lieu of prosecution that requires Ripple to beef up its anti-money-laundering efforts.

“The requirements on money transmitters who are registered with FinCen and licensed with the state are definitely increasing,” says Montreal attorney Adam Atlas, who works with independent sales organizations, money transmitters, and other payments clients in the U.S. and Canada.

Money transmitters also are now dealing with the federal Consumer Financial Protection Bureau, the new kid on the regulatory block. The CFPB, a creation of 2010’s Dodd-Frank Act, issued a remittance-transfer rule, effective in October 2013, that increases disclosure and error-resolution requirements on providers. Both Western Union and MoneyGram say in recent regulatory filings that they are now subject to CFPB examinations.

Collectively, money transmitters are spending tens of millions of dollars on compliance—everything from computers and software systems that monitor suspect transactions to lawyers. Western Union alone spent $180 million on compliance in 2014, including costs stemming from a 2010 agreement with the state of Arizona that required it to increase its security and anti-money-laundering efforts along the U.S.-Mexico border.

“It is a big factor,” says financial researcher Nancy Atkinson, a senior analyst at Aite Group. “Certainly anti-money-laundering has become a bigger and bigger issue. So is know-your-customer. We’re also seeing more demand for transparency.”

‘Financial Strain’

While regulation is a rising concern for money transmitters, the changes, and in some cases carnage, imposed by new competitors and technology are making their once-staid industry an interesting niche in the broader payments world.

Although the industry has been dealing with issues raised by technology and new entrants for years (“Money Transfer Begins To Rock,” May 2007), today’s more competitive market is manifesting itself in pricing pressures in some markets, dubbed “corridors” in industry jargon, including the U.S.

Much of the competition can be attributed to an outsider, Wal-Mart, the world’s largest retailer. Wal-Mart, MoneyGram’s largest agent, accounted for 27% of the wire-transfer company’s fee and investment revenue in 2013. But in April 2014, Wal-Mart announced that Ria would be its provider for U.S. store-to-store transfers of up to $900, with MoneyGram retaining transfers above that amount and pick-ups at non-Wal-Mart locations.

Wal-Mart’s new pricing through Ria was $4.50 for wire transfers of up to $50, and $9.50 for transfers valued at $50 to $900. In response, MoneyGram reduced U.S. prices.

Not only did the Wal-Mart deal cut more than a third of MoneyGram’s U.S. transaction volume in the first quarter, it also contributed to a 12% decline—8% on a constant-currency basis—in MoneyGram’s revenues, to $330.6 million from $374.9 million a year earlier. The company reported a loss of $72 million compared with net income of $39 million in 2014’s first quarter.

“In fairness, some of the pricing we had in play was arguably higher than it should [have been] at that time,” says Pete Ohser, MoneyGram’s executive vice president of business development. He adds that while MoneyGram’s new pricing will exert some “financial strain on us for a few quarters,” the changes were “the right thing to do for customers.”

Western Union also has cut pricing in the U.S. and some other countries in recent months, welcome news for consumers sending money abroad.

“In some corridors, we were far above the market environment,” Western Union president and chief executive Hikmet Ersek told analysts April 30 at the company’s first-quarter earnings call. (Western Union did not make an executive available for an interview with Digital Transactions.)

But intense price competition exists in relatively few markets. “I think most of the corridors are now quite stable,” Ersek said.

In fact, the G8 group of industrialized nations in 2009 announced a goal of reducing the average cost of cross-border remittances from about 10% of the transfer’s value to 5% by 2014. But average prices fell only to about 9% last year, according to Atkinson.

Why haven’t prices fallen more? Atkinson says providers’ costs have not come down all that much. And, she adds, “the market will support this higher level.”

Rise of the P2P Players

In any case, money-transfer incumbents and startups alike sense there are new opportunities to be had, many of them possible because of new technology.

Many new companies play in the online and mobile person-to-person payments space and thus represent competition to the established wire-transfer companies. The best known is San Jose, Calif.-based PayPal, which posted $227.9 billion in volume last year. To be sure, most of that volume went for e-commerce purchases, both from online and eBay merchants. But some also went for P2P payments among its 162 million customers. PayPal would not break out its P2P volume, but a spokesperson says its P2P growth rate was 40% to 50% in 2014’s first nine months over the same period in 2013.

A pure-play online money-transfer firm is San Francisco-based Xoom Inc. The company, whose biggest markets are India, the Philippines, and Mexico, according to Morningstar, posted a 23% increase in transaction volume in the first quarter to 3.55 million, and gross sending volume of $1.67 billion, up 6%. Xoom’s active customer base increased 19% to 1.34 million.

Xoom, which enables senders in the U.S. to transfer funds to 32 countries, casts itself as an industry upstart.

“With the widespread consumer adoption of digital channels and a steady proportion of the banked population among the foreign-born community in the United States, we believe we are disrupting the traditional forms of money transfer and cross-border bill payment with our services, which provide a convenient, fast, and cost-effective way to send money,” the company’s 2014 annual report says.

As Xoom’s latest customer counts attest, many consumers do like its services, including Aite’s Atkinson, who uses Xoom to send money to her daughter attending college in London. For a mere $4.99, funds are transferred into the student’s bank account just 15 minutes after mom hits the “send” button.

A sampling of other online P2P payments providers ranges from the famous, such as Square Inc. with its Square Cash domestic service, to lesser-known providers such as Mobetize Corp. and Skrill USA Inc. While not a household name, Skrill says it has 36 million account holders who can send and receive money in 200 countries and 40 currencies.

The very newest P2P payments providers that compete with established money transmitters deal in virtual as well as fiat currencies. Their ranks seem to grow by the day, but Ripple Labs is a prominent name in the space.

Another firm that has recently gained attention is Circle Internet Financial, which in April raised $50 million in a funding round whose co-leaders were Wall Street stalwart Goldman Sachs and China’s IDG Capital Partners. In addition to the Bitcoin virtual currency, consumers can now hold and send U.S. dollars from their accounts at Circle, which declined to be interviewed for this story.

Rebuilding the Platform

But agent-less P2P cross-border providers have a problem that the traditional money-transfer companies don’t: How to get cash into the hands of recipients who lack bank accounts or an account with a non-bank provider.

“The downside for Xoom—it’s really an account-to-account transfer,” says Atkinson. “If you have an unbanked receiver, there’s no bank into which the funds can be deposited. If you’re unbanked, [you] have to be able to get cash somewhere, somehow.”

Morningstar’s Horn adds that PayPal has a viable cross-border P2P service, but only for its members. “How many people have PayPal accounts in emerging markets?” he asks.

While many Xoom transactions go into bank accounts, the company does have so-called disbursement partners that, besides banks, include retailers. Some Wal-Mart locations in Mexico, for example, offer Xoom cash pickups.

Still, while Western Union, MoneyGram, Ria, and other agent-based providers retain a clear advantage when it comes to physical ubiquity, they’re recognizing that, in the era of smart phones and online payments, vast agent networks no longer are enough.

“We’re continuing to experience solid growth in the physical [network], but clearly the world is moving into digital platforms,” says MoneyGram’s Ohser.

In early 2014, MoneyGram unveiled its “Global Transformation” initiative, an $80 million-to-$90 million, three-year restructuring program that includes upgrading its self-service and compliance programs.

The program appears to be having results. MoneyGram Online transactions increased 21% and online revenues grew 11% in 2015’s first quarter.

At the same time, self-service transactions increased 55% and now represent 13% of money-transfer transactions. MoneyGram has rolled out self-service kiosks at CVS pharmacy stores in the U.S. and PrivatBank branches in Ukraine. Self-service revenues grew 45% over the prior year, accounting for 11% of money-transfer revenues. On an annualized basis, self-service channels will generate more than $125 million in revenues, MoneyGram said.

Under an initiative called MobileFirst, MoneyGram redesigned its mobile interface and then adapted it for the online-channel. Usually, technological upgrades work the other way around.

“With the proliferation of mobile and with the consumer engaging with that, we wanted to rebuild the platform,” says Ohser. “The user experience is exponentially better.”

Western Union, too, is rapidly ramping up its digital presence. WesternUnion.com, available in 25 countries, posted a 25% increase in consumer-to-consumer transactions during the first quarter. Most of that volume came from the U.S., and nearly half of it originated on mobile devices.

In all, Western Union’s electronic-channels revenues, including WesternUnion.com, account-based money transfers originated through banks, and mobile money transfers, grew 17% in the first quarter and now generate 7% of total revenues.

Western Union also is dabbling in virtual currency. Ripple Labs in late April said it would provide “infrastructure” to test real-time settlements with Western Union. Neither company provided details. In response to an analyst’s question about the test, however, Ersek said, “Our goal is to find new customer segments … we are always looking for other opportunities to upgrade our platform.”

Sheriff’s in Town

While they’re upgrading their platforms, the money-transfer providers also must be constantly looking over their shoulders at increasingly assertive regulators.

The federal government’s fine and settlement with Ripple Labs seemed to lay to rest any doubts that cryptocurrency providers could escape the rules with which the more established players must comply. Landsman of the NMTA likens the virtual-currency scene to “sort of the Wild West in the U.S.”

Now the sheriff has come to town.

“Virtual-currency exchangers must bring products to market that comply with our anti-money-laundering laws,” FinCen Director Jennifer Shasky Calvery said in a news release. “Innovation is laudable but only as long as it does not unreasonably expose our financial system to tech-smart criminals eager to abuse the latest and most complex products.”

While protecting consumers from fraud is a laudable goal, observers are noticing a downside to the increased emphasis on cross-border anti-money-laundering enforcement: reduced incomes in places with suspected terrorists that also are some of the world’s poorest countries.

An example is Somalia. A California bank that facilitated the most U.S. money transfers to Somalia pulled out of the market this year, leaving many Somali immigrants in Minneapolis and other Somali communities scrambling for alternatives to send money back home.

The recent World Bank report says anti-money-laundering and terrorism-financing regulations “should be designed to avoid … making it more difficult for money-service businesses to transact business with correspondent banks. The renewed focus on [enforcement] has led many banks to stop offering remittance services and to close the accounts of [money-transfer operators], especially affecting those serving Somalia. As a result, some small MTOs have closed since they could not operate without bank accounts.”

Attorney Atlas says “there’s room for discussion” about where to draw the line between “adequate security of the financial system on the one hand and allowing people to carry on their daily business” on the other.

“I would say the pendulum has moved toward protecting national security and away from making things easy for consumers and businesses,” he says.

But regulation, while increasing, still hasn’t deterred many companies from pursuing new opportunities in money transfers. At his recent call with analysts, Ersek said Western Union’s online services soon will be moving into many more countries. But he was speaking for the industry when he added: “It’s just the beginning of the game, actually.”