Money Transfer Report 2016 - Part 1


The rise of New Challenges in International Money Transfer
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Executive Summary

Over the last decade, international money transfer has gone from a routine service dominated by banks and traditional transfer providers to one of the most hyped segments of the current fintech explosion. One of the key drivers of this change has been the emergence of hundreds of new companies in the transfer space, many of which operate entirely through app and web-based interfaces and have embraced new technological developments such as peer-to-peer transfer systems. These new challengers (e.g. Transferwise, Remitly, WorldRemit, Payoneer) are now competing with traditional providers (e.g. Western Union, MoneyGram, WorldFirst) and international banks for customers and market share.

After surveying the industry in depth, we believe the following three points are key to understanding the industry’s present dynamics, and where it is headed:

  1. New challengers are successfully gaining market share from banks and traditional providers using a combination of lower fees and aggressive marketing, but still represent only a fraction of the total transfer market in terms of FX turnover and revenue..

  2. Banks have fared the worst during this transitional period and have been the slowest to adopt and incorporate new technologies, partially due to greater regulatory scrutiny and complex internal bureaucracies.

  3. Despite the inroads being made by new challengers, traditional providers still dominate the transfer market and have the financial resources to weather temporary disruptions in pricing.

While coverage of the industry has centered on new challengers and the potential of new technologies such as blockchain and peer-to-peer transfers to “disrupt” traditional providers, these companies face significant barriers to widespread adoption. Traditional providers have large, established customer bases, extensive agent networks throughout developing countries, and a high degree of brand recognition. Traditional providers also continue to dwarf challengers in terms of FX turnover, number of users, and cash flow. In particular, major players such as Western Union have formidable amounts of cash on hand for digital expansion, marketing, and other strategic priorities.

In 2015, for instance, Western Union facilitated nearly USD 74bn in international money transfers and spent USD 210m on marketing. In comparison, TransferWise reported a turnover of less than USD 15bn and spent approximately USD 16m on marketing. Many banks meanwhile have opted to either withdraw from the consumer remittance industry entirely, or scale back their participation. This is partially due to increased risk-aversion, and partially because they can afford to wait as challengers and traditional providers fight amongst themselves.

The following table illustrates the challenges and opportunities facing each type of transfer provider in the market today:

By Cameron Graham, Ian Manns, Andrea Barnes | October 11th, 2016

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Challenges and opportunities facing each type of transfer provide in the market today
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Key Challenges for the Industry

In addition to the individual challenges faced by each type of transfer provider above, we believe there are several large risks to the industry as a whole. The most pressing of these are:

  • Risk-aversion: Greater risk-aversion within banks has made it increasingly difficult for smaller, traditional brokers to open bank accounts and therefore operate. This could potentially lead to consolidation of the market and less competition, as smaller brokers are forced to partner with larger providers such as MoneyGram in order to secure access to banking facilities.
  • Declining profitability: As challengers and greater transparency within the market have driven down remittances prices, firms have seen their sales and revenue-per-transaction decline, despite the overall growth of the remittance market. These trends pose a long-term threat to the viability of companies within the money transfer industry.
  • Blockchain and distributed payment technologies: While there are significant hurdles to the widespread adoption of a completely distributed payment network, such a system would eliminate the need for many of the services transfer companies currently provide. It is therefore essential that companies monitor developments in this space, and incorporate any technological advancements.

The money transfer industry has received an unprecedented amount of media attention in recent years, as firms such as Transferwise, WorldRemit and Payoneer have raised the industry’s profile and made it the cool part of the current fintech revolution. Yet while the transfer industry has undergone significant change during this period, this is likely to only accelerate as new challengers must now battle traditional providers for market share and customers, while banks assess their desire and ability to stay relevant within the market. The firms that best manage this transition, and the current industry headwinds, will likely be those who can adapt their strategies and business models in the face of shifting consumer priorities and ever-evolving technologies.

Growth of the Money Transfer Industry

Growth of the money transfer industry in 2016
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The international money transfer industry has expanded dramatically over the last decade from a space dominated by banks and traditional transfer services to an evolving field shaped by startups and new technology. In 2005, only a handful of internet-based money transfer services existed. Today, there are hundreds of new challengers listed in startups directories such as Crunchbase and AngelList, in addition to the larger numbers of traditional money transfer agents and over-the-phone currency brokers. The largest of these challengers, such as Transferwise, WorldRemit and Payoneer, have raised hundreds of millions in USD in venture capital and are valued even higher.

This growth within the industry has been in part driven by an increase in worldwide remittances. The World Bank estimates that worldwide remittances have more than doubled from USD 282.5bn in 2005 to USD 581.6bn in 2015. By 2016, total transaction volume is forecasted to exceed USD 600bn. The majority of internet-based firms operating in the money transfer space base their official market size calculations off of the World Bank remittance data, while acknowledging the actual market is almost certainly bigger. For instance, McKinsey estimates international payments will exceed USD 2tr by 2020, while Forbes, in conjunction with Transferwise, has estimated the combined consumer and small business transfer market is worth USD 3tr. The Bank of International Settlements (BIS) meanwhile estimates the volume of money transferred internationally, including corporate payments and household-sector transactions recorded in countries’ balance of payments accounts, totals USD 186bn per day. Traditional incumbents that cater to business and enterprise clients (e.g. Moneycorp, WorldFirst, Monex, CambridgeFX, AFEX) operate somewhere within this larger market framed by the BIS data.

Key Drivers of Growth

The recent increase in the number of money transfer companies stems from a range developments, including growing demand from international migrants. Meanwhile, new technology has allowed smaller companies to challenge the industry’s traditionally high costs, limited distribution methods, and limited payment systems. At the same time policy changes, along with transparency and public awareness campaigns led by the World Bank, BIS, G8 and UN have also made it easier for customers to understand the price of transferring money. This transparency has in turn helped to increase competition in many markets.

Since 1990 the number of international migrants has grown substantially. By 2015, there were 244m international migrants in the world, an increase of nearly 60% from 154m in 1990 according to UN figures. The majority of these new migrants have moved from developing to developed economies. Growth was particularly strong during the 2000s, when the worldwide migrant stock grew by an average of 4.6m people per year before slowing to 3.6m per year after 2010. This accumulation of migrants in developed countries has helped create demand for new money transfer services. As migrants move from developing countries into wealthier nations, they send money home, in turn expanding remittance corridors and the international transfer market.

However, the growth of the money transfer industry cannot be attributed simply to an increase in international migrants. While such dynamics have certainly helped underpin the demand for cheaper, more-responsive transfer services, current new challenger money-transfer providers have also benefited from the spread of internet payment technology and consumers’ rapid uptake of alternative financial services.

Perhaps most importantly, internet access became ubiquitous in developed countries throughout the 2000s. At the start of the millennium, only 27.6% of households in OECD countries had internet access, as tracked by the OECD Factbook. By 2011, this had increased to 74.9% of households. Smartphones and cellular networks have likewise proliferated. According to the International Telecommunication Union, there were over 7bn mobile cellular subscriptions by the end of 2015, representing a 97% global penetration rate. Likewise, it is now estimated that over a quarter of the world’s population now owns a smartphone.

This spread of mobile and internet infrastructure has also led to greater frequency of use. In the UK, 78% of adults now use the internet every day, up from 35% in 2006, according to the Office of National Statistics. Together, the rapid penetration of the internet and cellular devices provided a platform for migrants to form digital networks and on which new startups could build.

Building Digital Infrastructure

One of the first companies that paved the way for today’s money transfer services was PayPal. Founded in 1998 as a cyber security firm, PayPal quickly pivoted to online payments, and was acquired by eBay in 2002. Although the ability to make payments online and transfer money between individuals is now taken for granted, PayPal was the first company to tackle this challenge, at the onset of internet commerce. In particular, transferring money between individuals who did not know each other was a particularly difficult proposition in the United States in the early 2000s. Names, bank account numbers, and routing codes would have to be exchanged, and once a transfer was made there was little recourse in case of fraud. PayPal, while relying on bank networks at each end of a transaction (for clearing and storing funds), simplified the details of such payments and assumed the role of trusted middleman. Tethered to one of the internet’s great early success stories - eBay - PayPal quickly gained millions of users. While PayPal did not attempt to subvert the traditional payment infrastructure, it played a key role in convincing millions of people that digital, person-to-person payments could be secure, reliable, and most importantly - simple. Although PayPal has historically charged high fees for transferring money between currencies, the entirely digital approach represented a new and streamlined approach to the often complicated process of international bank transfers, especially between individual buyers and sellers.

In the years following PayPal’s success, new cross-border money transfer startups began appearing, including Xoom in 2001, MoneyTrans in 2002, ShareMoney in 2003, and M-Pesa in 2007. We call these startups the new challengers, as they have changed the international transfer industry with their embrace of technology and focus on growth over profits. Even so, during the mid-2000s, the industry experienced only modest change and remained dominated by banks and traditional transfer providers such as Western Union. However, the 2008 financial crisis would hasten the industry’s transformation.

In aftermath of the 2008 financial crisis, public sentiment toward the financial sector was extremely negative. According to an annual survey by global PR firm Edelman, consumer confidence in banks’ ability to “do the right thing” fell 46% in the US and 30% in the UK between 2008 and 2012. Globally, less than half of consumer’s expressed confidence in the financial industry as a whole, making it the least trusted industry. Consumers have at the same time become more open to alternative financial providers. In a 2015 survey conducted by Ipsos MORI for LinkedIn, over half (57%) of Canadian and American millennials said they were open to using financial products from non-financial services brands. This change in sentiment provided an opportunity for a host of startups to challenge traditional financial service providers, and likely encouraged investors searching for the next market primed for “disruption”.

In the aftermath of the financial crisis, big banks pivoted their focus to core services such as deposits and loans, paying less attention to peripheral services like money transfer. Meanwhile, increasingly stringent regulations related to Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations led to increased risk-aversion among banks, particularly in the US. Major banks, including JPMorgan Chase and Bank of America, shut down their consumer-focused remittance services, while other banks began closing the accounts of smaller, independent FX brokers en-masse to avoid potential AML violations. These changes created an additional market opening for new challengers seeking a customer base.

Liquidity providers in International money transfer
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London As A Global Fintech Hub

The amount of venture capital raised by money transfer companies since 2010 (and especially over the last three years) serves as a proxy for the growth of new-challengers in the industry. As of October 2016, transfer companies have already raised more in funding than the cumulative total raised in 2015 - in no small part due to Payoneer's USD 180m funding round.

Annual capital raised by money transfer startups 2010-2016

The UK in particular has proven a welcoming destination for fintech companies. Among the Fintech50, an annual list of the most promising new companies, 29 were launched in London. Partially this is due to London’s well-established venture-capital network. Of the USD 3.6bn in venture capital raised in the UK during 2015, over a quarter went towards fintech. Of that sum, according to Crunchbase data, more than 25% was raised dedicated money transfer companies. In addition to funding, regulation has also played an important role in London’s prominence. Because the UK is a member of the EU, companies located there can take advantage of the so-called financial services passport. Once passported in the UK, a transfer company can provide financial services to any country in the European Economic Area (EEA), without applying for specific licenses in each state. For new challengers, this makes London an ideal launching pad for European expansion. However, London’s status as Europe’s fintech capital could be undermined by the UK’s recent vote to leave the European Union, which may create additional barriers to entry for financial firms looking to access the single market.

This is also one of the reasons why money transfer startups have favored the UK and EU over the United States. While the EU’s regulatory structure makes expansion easy, the US’s network of state regulations poses a significant barrier to would-be transfer companies. WorldRemit, for instance, which raised USD 40m in venture capital to jumpstart its US expansion in 2014 is currently licensed in only 41 out of 50 states, and is still in the midst of satisfying legal and regulatory requirements in the remaining nine. Still, a number of high profile challengers (e.g., CurrencyFair, Transferwise) have recently begun expanding into the US.

As current challengers begin to scale, other markets are likely to pose different and unique challenges. Strict capital controls in many nations may require transfer companies to artificially restrict the size and volume of transfers they facilitate, while state intervention into FX and remittances can lead to unpredictability in other markets.

Since the first new challengers were founded in the late 1990s and early 2000s, the industry has undergone remarkable change. The spread of internet and cellular infrastructure, changing consumer sentiments towards financial services, and a global increase in migrants have all contributed to fintech’s new prominence and the increasing competitiveness of the money transfer industry. As the next section will outline, these changes have largely been made at the expense of banks. is an fx money comparison site for international money transfer and to compare rates from currency brokers for sending money abroad. The website and the information provided is for informational purposes only and does not constitute an offer, solicitation or advice on any financial service or transaction. None of the information presented is intended to form the basis for any investment decision, and no specific recommendations are intended.  FXC Group Ltd and FX Compared Ltd does not provide any guarantees of any data from third parties listed on this website. FX compared Ltd expressly disclaims any and all responsibility for any direct or consequential loss or damage of any kind whatsoever arising directly or indirectly from (i) any error, omission or inaccuracy in any such information or (ii) any action resulting therefrom.