The Digital Revolution Comes to Remittances

Western Union, MoneyGram, and Ria have ruled the money-transfer landscape for decades. Now they are challenged by a slew of digital-first upstarts. Does the old guard have what it takes to stay ahead of the competition?

From mobile wallets and person-to-person payments to cryptocurrencies and blockchain ledgers, digital disrupters are everywhere in payments. Money transfers are no exception.

In recent years, fintech companies—some of them backed by powerful parents—have emerged to challenge the legacy players of the money-transfer industry: The Western Union Co., MoneyGram International Inc., and Ria Money Transfer.

The newcomers, which include such players as Remitly Inc., Transfer­Wise Inc. and PayPal Inc.-­owned Xoom Corp., are carving their own niche in the $689-billion global remittance market. This new breed of players specialize in end-to-end digital transactions rather than rely on the agent networks Western Union and MoneyGram built the backbone of their businesses on. And they are steadily eating into the legacy providers’ market share, as measured by transactions processed.

In 2018, Western Union saw its share drop to 12.7% from 13.7% three years earlier, according to Boston-based Aite Group. During the same period, MoneyGram’s share declined to 5.3% from 6.4%. Ria, a subsidiary of Euronet Worldwide, Inc., was the only one of the big three to boost its share, claiming 6.4% of the market 2018, from up 4.4.% in 2015, Aite says.

Transfer­Wise enjoyed the largest gain among the digital-first upstarts, notching a 6.8% share in 2018, up from 1% in 2015. While newcomers such as Remitly and WorldRemit Corp. have enjoyed explosive transaction growth, they still command less than a 1% share.

In addition to gaining share, the newcomers are expanding the infrastructure for real-time digital cross-border remittances. That makes it easier and faster to move money to unbanked consumers with mobile wallets than is possible through an agent-based network, payments experts say.

The impact on the money-transfer landscape has not gone unnoticed by venture capitalists. Earlier this year, Remitly received a $220 million cash infusion on top of the $115 million in funding it took in in 2017. The latest investment was co-led by PayU, an Amsterdam-based financial-services provider that supports cross-border payments. In both cases, funding was earmarked for development of new services to attract more customers and expand existing customer relationships.

Other digital-first companies enjoying the largesse of investors include WorldRemit, which received $175 million earlier this year. In 2018, Azimo and Flywire received $120 million and $110 million, respectively, and TransferWise landed $280 million in capital in 2017.

“Competition in the remittance industry is very stiff thanks to the entry of digital-first players, and that has led to some massive investment in them the last few years,” says Talie Baker, a senior analyst for Aite Group. “The growth and expansion of these companies is eroding market share for the legacy players.”

One reason for the increased competition in money transfer lies in the continued overall growth of the market. In 2018, remittances grew 8.8% from $633 billion in 2017, according to the Washington D.C.-based World Bank. Digital remittances are estimated to be 10% to 15% of total remittances, up from a 7% share in 2016, Baker says. Overall, Aite projects cross-border remittances will reach $739.2 billion by 2020.

A key driver of the growth lies in remittances to low- and middle-income countries, which are expected to reach $550 billion in 2019, up from $529 billion in 2018. Remittances to these countries are fueled by immigrants working in wealthy countries that send money back home to their families, the World Bank says.

Nimbleness Needed

With digital remittances growing fast, the big question facing Western Union, MoneyGram, and Ria is: Are they nimble enough to keep the fintechs from eating their lunch?

Payments experts say yes, but caution that fending off the upstarts won’t be easy.

“The old guard is undergoing a transformation in their business right now,” says Nick Maynard, lead analyst for Juniper Research, a United Kingdom-based technology consultancy. “While they have all launched pretty good mobile apps, that’s not necessarily going to be enough to offset the appeal of the fintechs to consumers.”

The additional firepower the big three need to fend off the competition, Maynard argues, will come from partnerships and interoperability agreements with digital money-services providers that can make money transfers faster, less expensive, and more convenient. “That can help them stay ahead of the curve,” Maynard says.

MoneyGram and Ria took steps in that direction earlier this year by partnering with blockchain specialist Ripple Inc. In August, Dallas-based MoneyGram announced it was using Ripple’s xRapid cross-border payment platform. MoneyGram chairman and chief executive Alex Holmes says partnering with Ripple will make cross-border payments faster, more efficient, and more secure.

“Moving money across borders is complicated,” Holmes says by email. “Our partners are collecting and paying money on our behalf to our customers and we have to settle with them every night—that can be a cumbersome process. We do it well, but there are some inefficiencies. Our joint partnership vision with Ripple is to help money move across borders as easily as information moves today.”

In addition to its partnership with MoneyGram, Ripple has taken a $30 million equity stake in the company. Ripple also holds an option to infuse another $20 million in equity in MoneyGram.

With Ripple as a stakeholder, MoneyGram sees an opportunity to expand Ripple’s technology platform and grow its digital network by jointly developing markets for Ripple’s technology over the next two years, says Holmes.

MoneyGram also launched a partnership with Visa Inc. this summer that it expects will further build out its digital-remittance business. “Strategic partnerships will be key to growing our digital side,” says Holmes.

Sticking Point

In May, Ria joined Ripple’s payments network, known as RippleNet, to speed cross-border payments. The integration of RippleNet will enable Ria users to track the status and delivery of money and have more fee transparency. RippleNet’s network comprises more than 200 financial institutions worldwide.

As with its partnership with MoneyGram, Ripple’s deal with Ria will expand its payment platform by allowing RippleNet customers access to Ria’s network to send and receive cross-border payments, Ripple said in a blog post when the deal was announced.

Despite piloting Ripple’s cryptocurrency, Western Union has not been as quick to partner with Ripple. The sticking point, according to Western Union, is that cryptocurrency transactions are not as cost-efficient as conventional transfers. Denver-based Western Union, however, says it will partner with Ripple if the economics make sense.

“As the regulatory nature of cryptocurrencies comes into focus, Western Union will explore their benefits to consumers and consider offering digital currencies as a payment option where there is a demonstrated value,” says Patrick Ramsey, vice president and global head of partnerships for Western Union.

Western Union’s wait-and-see attitude toward Ripple has not prevented the company from striking partnerships with other digital-payments players. In May, it partnered with Thunes, a cross-border network that delivers payments for emerging economies, to allow customers to send funds to mobile wallets. Western Union is also looking at blockchain applications for transaction processing and settlement and improving identity confirmation and regulatory compliance for cross-border transactions.

“Blockchain and other distributed-ledger technologies may provide developing markets that lack centralized resources opportunities to broaden financial inclusion,” Ramsey says. “We’re open to technologies that have the potential to drive connected globalization.”

Pricing Puzzles

While partnerships with the likes of Ripple and mobile wallet providers may help Western Union, MoneyGram, and Ria expand their digital footprint, they still have to be price-competitive. “In many cases, the cost of a money transfer through Western Union or MoneyGram is higher than for the digital startups,” Maynard says. “Conducting a money transfer at a lower cost, and faster, is a differentiator.”

To attract new users to its digital platform, MoneyGram has rolled out introductory pricing for online-only transactions and lowered its prices for other transfers in legacy markets. Outbound pricing for all online transactions originating in the United States is now $4.99. Consumers can also go to the MoneyGram Web site to see the cost of a nondigital cross-border transfer.

So far, MoneyGram’s introductory pricing has been successful in attracting and retaining new customers. “Customers aren’t switching to us for the low price and then leaving,” Holmes says. “In Europe, for example, we recently shifted our pricing, and our volume was not negatively impacted. Our data shows customers who try the new MoneyGram app consistently return to use it.”

Western Union says its pricing varies among the 20,000 markets it serves. Factors influencing price include compliance costs, the destination country’s technological infrastructure, and the level of service the customer chooses. Overall, the company says remittance costs generally have been decreasing for more than a decade due to such trends as improved scalability, introduction of new product and service options, expanded channels, and increased competition.

Ria declined interview requests for this story.

One advantage the legacy players have over their digital-first counterparts in attracting new customers is their cash-pickup networks. Western Union is bullish that many consumers sending money cross-border to recipients that lack bank accounts will actively embrace a hybrid of digital remittances, such as sending money via its app and having the recipient pick up the funds in cash at one of its agent locations.

“There are consumers that will leverage only a part of our digital services, because that is what’s relative to them,” says Ramsey. “Although we are looking to drive digital innovation, its use still comes down to whether it is a relevant solution for serving customer needs in a particular market, such as in developing countries where the digital infrastructure is not as far along.”.

Offering a menu of digital and non-digital services that consumers can mix and match could prove to be substantial advantage not just for Western Union, but also for MoneyGram and Ria.

“While digital send capabilities are a priority for all money-transfer companies, cash pickup is still the primary way people receive remittances,” says Baker. “The challenge for digital-first firms then is going to be showing a profit going forward, not just potential, because I think digital is going to take a little longer to dominate on the receiving side.”