Xoom Faces Growing Competition From PayPal and Traditional Wire-Transfer Rivals

Despite its strengths, online wire-transfer provider Xoom Inc. faces increasingly tough competition from newer market entrants such as PayPal Inc., which is taking its popular Venmo person-to-person payments service abroad, and from established agent-based providers such as The Western Union Co. and MoneyGram International Inc., which are increasing their online offerings and cutting prices in some key corridors.

In a report issued Monday, stock analyst James E. Friedman of Bala Cynwyd, Pa.-based Susquehanna Financial Group downgraded Xoom from “positive” to “neutral.” The downgrade apparently triggered a 7.7% drop in Xoom’s share price Monday, which closed at $20.64 on the Nasdaq Stock Market.

But the downgrade has as much to do with what its rivals are up to as with Xoom itself. “Though we view Xoom as the market leader in future-state money transfer, the competitive environment is not getting easier,” the report says.

Friedman, who wrote that Xoom is “taking a breather,” noted that Xoom shares had risen 56% in the second quarter, far more than the 1% and 12% for Western Union and MoneyGram, respectively. “My call was more that the stock has rallied so much, there\’s little margin for error,” Friedman tells Digital Transactions News by email.

San Francisco-based Xoom has made a name for itself by facilitating easy online money transfers from the U.S. to more than 30 countries. Its biggest markets are India, the Philippines, and Mexico, which account for nearly 75% of the company’s revenue. Xoom 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%. The active customer base increased 19% to 1.34 million.

“Thanks to first-mover advantage, superior technology and a better user experience, we continue to view Xoom as the leader in online/mobile money transfer,” Susquehanna’s report says. “Perhaps it\’s competition, or maybe the products are ahead of the market. But we are less confident in the midterm growth trajectory of the business.”

Working against Xoom, which Friedman says “has been very disciplined on price,” are downward pressure on fees for transfers to Xoom’s three key markets. The report notes that data from the World Bank, which tracks the money-transfer market, suggest “modest deterioration” in pricing in those countries.

For example, a $500 Western Union transfer to Mexico funded by a credit or debit card cost $14 in early 2012 but now costs $7.00. MoneyGram has cut its price for a similar transfer from $9.99 to $5.00. Zoom has maintained its U.S.-Mexico pricing at $4.99.

Xoom typically is at or below its two largest competitors in the high-traffic U.S.-Mexico corridor, but rivals such as PayPal and Euronet Worldwide Inc.’s Ria unit sometimes have lower pricing, depending on amount, country, funding type, and time of funds availability. PayPal/Venmo pricing for an automated clearing house network transfer to India can go as low as $1 for a $200 transfer and $2.50 for $500 versus $2.99 for Xoom in both cases.

“While none of these services may be as fast or elegant as Xoom, they are viable in our opinion,” the report says.

PayPal, which will be divested from parent company eBay Inc. July 17, has targeted money transfers as a growth area, according to Susquehanna. PayPal already offered international money-transfers, but now it’s bringing its Venmo person-to-person payments unit into the cross-border mix. Venmo, which came under PayPal’s wing when eBay acquired Venmo parent company Braintree Payments Solutions LLC in 2013 for $800 million, is popular among young adults, and users don’t need PayPal accounts.

“In the last few weeks we’ve found PayPal has revamped its money-transfer site as it seeks to grow in that space,” the report says. “PayPal’s remittance pricing is now lower than some in the peer group for ACH: it costs $1 to make transfers from ACH and $7.10 if using credit/debit cards to Mexico/India/Philippines.”

Friedman, in his email to Digital Transactions News, adds that regarding Venmo’s cross-border service, “we tried it and it works.”