Money Transfer Report 2016 - Part 2


The Money Transfer Industry Today

There are three primary types of companies operating in the money transfer industry - banks, traditional providers, and new challengers. Below we have outlined the opportunities and challenges facing each type of company.

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

Challenges and opportunities facing each type of transfer provide in the market today
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Within each category of companies, there are also significant discrepancies between firms in size and market share. Below, we’ve listed a number of traditional providers and challengers based on their reported and estimated FX turnover for 2015. This provides a basic way to conceptualize who the primary companies are in each category.

2015 FX turnover among money transfer companies

As these charts illustrate, Western Union and TransferWise are the preeminent companies among their respective peers. However, the scale of their operations is vastly different. Despite its rapid growth, TransferWise handles approximately USD 9bn annually, slightly more than one-tenth of Western Union’s USD 73.6bn turnover. We’ll explore both companies metrics and operating models in further detail below.

How Transfer Companies Make Money and Who Uses Them

In order to understand today’s money transfer market, it is necessary to understand the different ways in which companies make money, and the types of customers they serve.

Typical money transfer customers can be divided into four general types. Although the industry has changed rapidly over the last decade, the reasons people move money internationally have remained largely the same. Here are the major customer types for transfer companies:

Types of Money Transfer Customers and Their Frequency/Volume
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Money transfer providers primarily make money in two ways. The first is through any direct fees they charge for making a transfer. For smaller transfers such as remittances, this often takes the form of a flat fee. For larger transfers, the fee may be a fixed percentage of the total amount. The second way companies make money is through managing the exchange rate spread of a transaction, i.e. by securing a low spread for themselves due to the scale of their operations, then providing a less favourable spread to their customers. The difference between the two represents their profits.

Whereas banks make a significant portion of their money from the spread between the interbank exchange rate and the exchange rate they offer to customers, traditional money transfer companies (e.g. Western Union or MoneyGram) operate on a primarily fee-driven business model. In 2015, for instance, transaction fees accounted for 74% (or USD 3.2bn) of Western Union’s consumer-to-consumer transfer revenue. Among new challengers, there are a variety of pricing models in use, from bitcoin-based companies (e.g. that charge no transaction fees but require users to fund their transfers with bitcoin, to mobile services (e.g. M-Pesa) which charge fixed amounts depending on the transfer volume and levy a small fee on cash withdrawals from their network.

Below we’ve summarized the primary ways in which different types of money transfer companies generate their revenue, and which customers they target.

Fee Structure and Customer Type of Money Transfer Providers
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Industry Trends: Lower Costs for Consumers, Declining Margins for Companies

As a result of the industry’s growth and increasing competition, global transfer costs have steadily declined in recent years. The average global cost of sending the equivalent of USD 200 in remittances has dropped from 10% of the transfer amount (or about USD20) in 2008 to 7.5% (about USD15) in the first quarter of 2016. In particular, non-bank providers have driven down costs in developed countries such as the UK, US, and Canada. This is likely due to the increased amount of competition in such markets. The most expensive transfers meanwhile are in Sub-Saharan Africa, where the cost of sending remittances was 9.7% in the first quarter of 2016, as measured by the World Bank. This movement towards lower transfer costs has in part come from new challengers in the market that have undercut banks and traditional providers.

Since the mid-2000s, the topic of remittances has become an active area of engagement for international organisations such as the World Bank and BIS - which co-published General Principles for International Remittance Services in 2007 with a view towards increasing transparency and lowering user costs. Remittances have also become an area of concern for global policy makers. In 2009 at the G8 L’Aquila Summit member countries committed to reducing the cost of remittances from 10% to 5% by 2014, which became known as the “5x5 Objective”. In 2011, the G20 backed also pledged support for the initiative. While the 2014 “5x5 Objective” was not met, remittances targets found their way into the UN’s Sustainable Development Goals. Goal 10.c states: “By 2030, reduce to less than 3 per cent the transaction costs of migrant remittances and eliminate remittance corridors with costs higher than 5 per cent.”

According to the World Bank, remittance prices are driven by three main factors: the number of migrants in a corridor (volume effect); higher incomes related to higher prices; and competition and market structure (more non-banks and greater competition leads to lower prices). The World Bank also suggests public policy and advocacy have helped reduce the cost of remittances in recent years. At the same time, recent consolidation of smaller, phone-based brokers and independent storefronts into known providers such as Western Union and MoneyGram have contributed to an uptick in costs in the first quarter of 2016.
How Much It Costs To Transfer 200 USD

According to FXcompared’s International Money Transfer Index, which tracks transfers of GBP 1,000 to GBP 1 million, banks are now the least competitive players in the market in terms of price. For transfers equal to GBP1,000, banks routinely charge three times more than non-bank providers. Across the UK, US, Canada, and Australia, banks charged an average of 5.27% for such transfers, while non-bank providers charged 1.75% on average.

Cost of Money Transfers Equivalent to 1000 GBP

This discrepancy narrows somewhat for transfers of higher amounts. For transfers equivalent to GBP 10,000, banks charged an average of 3.5% compared to 1.0% for non-bank providers across the four countries surveyed. Still, this represents an additional GBP 254 in costs for an individual if they go through a bank rather than a non-bank transfer service.

Cost of Money Transfers Equivalent to 10000 GBP

In part, banks uncompetitive rates are due to the integrated nature of their operations, high infrastructure and personnel costs, and the increased regulatory scrutiny they have faced in the wake of the 2008 financial crisis. These constraints are unlikely to change soon suggesting banks will remain the least competitive players in the money transfer industry for the foreseeable future. Banks such as JP Morgan Chase, Bank of America, and Citigroup have recently shut down or spin-off their consumer remittance services. This suggests some banks may have decided not to compete against new challengers in the lower-value remittance market or for price-conscious customers.

Among non-bank providers, there are also significant cost differences between traditional providers and new challengers. Similar to banks, many traditional providers maintain physical infrastructure networks via licensed agents who accept cash deposits. Because of the increased infrastructure costs of such a business model, and the need for various revenue sharing agreements with agents, these providers often charge higher fees than challenger companies which are typically unencumbered by physical agent locations or in many cases the need to generate profits. Companies such as Dahabshiil that operate throughout Africa and other developing countries also face higher costs in serving markets which lack widespread, reliable tech infrastructure or standardized regulations.
How Much Companies Charge to Transfer Money

This distinction can be seen even more clearly when looking at the total transfer costs charged by Western Union versus Transferwise, along the same routes.

Cost of Using Western Union Versus TransferWise

While the total cost of using TransferWise for international money transfers has hovered between 0.5-2.5% since 2014, Western Union has consistently charged between 7.5-9% along the same routes. For a USD 200 transfer, this would equate to an extra cost of USD 10-15 for the consumer if they used Western Union instead of TransferWise.

Possibly due to such competition within the market and recent pressure on prices, Western Union’s underlying financials have weakened since the early 2000s. Western Union’s consumer-to-consumer operating margins declined from 32% in 2005 to 24% in 2015, while revenue per-transaction has also fallen from USD 29.4 in 2004 to USD 16.4 in 2015.

Western Union Revenue Per Transaction

Despite such significant declines, Western Union’s revenue has remained largely steady thanks to the overall expansion of the remittance market. Consumer-to-consumer transaction volume for example has increased by over 150% from 96.7m transactions in 2004 to 261.5m in 2015. If transaction volume does not continue to grow, or begins to decline, Western Union and other traditional providers may find themselves unable to sustain their current revenue projections without raising fees.

The Shift to Mobile

Along with increased competition, new challengers have brought mobile applications and a digital-first focus to the forefront of the consumer transfer market. Enabled by the rapid penetration of cellular networks and smartphone ownership, new challengers such as Azimo and Transferwise can likely attribute part their rapid growth and extensive press coverage to being among the first companies in the industry able to complete actual transfers over mobile. Since then, many other challengers (e.g. Payoneer, BitPesa, and Boom) have all leveraged the internet and digital apps to jumpstart growth and reduce overhead costs.

Compared to new challengers, traditional providers have been slow to embrace digital services. Western Union, the oldest and most established money transfer service, only released a mobile international transfer application in October 2015, three years after Azimo launched theirs. Despite this delay however, traditional providers do appear to be competitive within the space. In the UK app store, for example, Western Union’s “International Money Transfer App” has recently outranked above both Transferwise and Azimo’s apps in terms of downloads. In the US meanwhile, Western Union’s mobile app outranks any other transfer provider app aside from banks, while Xoom is a close second.

Transfer App Rankings in UK iOS App Store

As can be seen, while Transferwise, Azimo, and WorldRemit are the most popular of the new challengers in the UK App Store, Western Union has been able to surpass them despite its relatively recent entry into the mobile space. This is likely due to its distribution capability - ie a large annual marketing spend, established customer base, and high name recognition among consumers.

Transfer App Rankings in US iOS App Store

In the US App Store, Western Union has had the most popular transfer app for some time, while Xoom and MoneyGram have popular offerings as well. Remitly and Transferwise, despite hype surrounding their platforms, remain solidly behind in terms of downloads.

The increasing prevalence of mobile services is also a response to consumer demand. According to a 2016 survey from Juniper Research and AmDocs Mobile Financial Services, 83% of consumers in the United States and Germany expressed interest in using a mobile money transfer app. Of those respondents, an additional 41% said they would be willing to switch to a mobile money transfer operator if the fee was under USD4.

Unbanked consumers may also benefit from the recent focus on mobile. According to McKinsey 2.5bn adults do not use formal banking or semiformal microfinance institutions to save and store money. With the spread of cellular infrastructure in developing nations, many of these people have or will soon have the ability to store and transfer money via mobile platforms. This demographic has already been targeted by services such as M-Pesa, which operates a combined money transfer, branchless banking, and microfinance platform entirely through mobile networks. In April 2016, Vodafone announced it had 25 million active M-Pesa users globally. As more services begin to target this market, mobile standalone transfer applications will become increasingly important.

Challenge: Can new challengers maintain their mobile and technological advantage as first-movers, or will traditional providers close the gap with their greater resources? 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.