Latin America Advisor

A Daily Publication of The Dialogue

Is the Money-Transfer Industry Facing a Shake-up?

Sagar Savla / CC BY-SA 3.0

PayPal announced last month that it is acquiring online money-transfer firm Xoom in an all-cash deal. Will PayPal become a major player in the remittances sector? How big a threat is the company to more traditional money-transfer service providers such as Western Union and MoneyGram? To what extent will PayPal disrupt established business models in the remittances industry?

Manuel Orozco, director of the Migration, Remittances and Development Program at the Inter-American Dialogue: “The acquisition of Xoom sends three main messages. First, it recognizes that the cross-border payment industry is a valuable market to investors. Second, investing in Xoom Corp. allows PayPal to establish a footprint in a space in which it has struggled for a decade to have a presence without generating a plan or solution from within. Third, it shows that Internet-based digital payments are central to current market growth. In that sense, there is more symbolism in the acquisition. However, it sends a strong message to existing competitors that access to capital will come from investors interested in these types of companies. The past three years have seen investments in businesses offering Internet-based digital cross-border transfers. The acquisition poses a challenge but not a threat to competitors in the cash-to-cash business: to speed their developments into Internet-based transfers quicker than planned. Most major companies already have an operational remittance sender Internet-based platform or are in the process of rolling one out. Those who do not have one out are slowly seeking to measure and contain the potential risk that these transfers are faced with (such as identity fraud, database hacking and card fraud). They are aware that mobile payments are showing exponential growth and staying only with C2C services is an incomplete strategy.”

Mario Trujillo, chairman, president and CEO of DolEx Dollar Express: “PayPal has been a formidable, electronic payments company, focusing mostly on P2P payments, eBay’s core business and other C2B payments. As a standalone business, it should be able to focus and innovate. Xoom, after more than a decade, also found a niche in the last few years in online/mobile family remittances, mostly originating from the United States to India, the Philippines and Mexico. MoneyGram, at half the equity price, looks like a better value. Now, as far as either company disrupting the traditional players worldwide and becoming a major traditional remittance competitor, the challenge is very different. Today, there are at least 50 recognized innovator startups, some very well-funded, also trying to disrupt the traditional remittance markets. All of these players have one thing in common: customers must be banked or have access to a bank or ‘value’ account, credit or debit card to initiate a payment. More than 90 percent of family remittances are made by un-banked or under-banked individuals. All of these innovators will be competing for this same ‘top of the pyramid,’ banked and tech-savvy customer. Both Western Union and MoneyGram have online/mobile platforms and massive retail distribution for the un-banked/under-banked customer, and none of the online/mobile innovators will disrupt their traditional customer business overnight. What’s more likely is that the traditional players will adopt best-of-breed technologies and compete, for the ‘top of the pyramid’ customer business as well. Those most at risk are the banks, which are not equipped, competitive or service oriented to handle this sophisticated customer.”

David Landsman, executive director of the National Money Transmitters Association: “Whenever you think of Internet money transfer, the two names that spring to mind are PayPal and Xoom. Now, they are one. To recall a phrase Joe Biden made famous, this is a big deal, the biggest deal in the remittances world since First Data spun off MoneyGram. Although seen mostly as a payments company, PayPal was already a pretty big player in the remittances market. Some portion of the purchase price can be attributable to the motivation of killing a competitor and to prevent anyone else from getting Xoom. But the two companies are not direct competitors; their offerings are complementary. Since Xoom has always specialized in remittances more than PayPal, and they have more receiver-friendly distribution channels, this deal will catapult PayPal firmly into the remittances world. But that’s not all. Xoom has plenty of intrinsic value (that is, future profi tability) in its customer goodwill and in the operation itself. There will also, no doubt, be many back offi ce redundancies that can be eliminated. Nevertheless, the Xoom brand should survive well. Now, PayPal has jumped into the remittances market with both feet, and the combined entity already has a good remittances volume, and is already huge. To the extent consumers are more and more willing to pay and accept payouts through digital channels, the new PayPal/Xoom will shake things up quite a bit competition-wise.”

Richard Child, CEO of Mattrix Group: “The purchase of Xoom by Pay Pal is indeed an interesting acquisition and signals Pay Pal’s determination to enter the money remittance market. Given Pay Pal’s current business model and the fact that it does not rely on brick-and-mortar to undertake its business leads me to believe that its participation in the remittance market will be disruptive in nature. To date, the remittance business has been built on a very traditional model and is highly dependent on physical acquisition and distribution networks. If PayPal and Xoom can win over customers to an electronic medium for transactions and don’t face signifi cant regulatory hurdles, I believe we will see a signifi cant increase in competition and the beginning of a new era in the remittance industry.”

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