Messenger Money - sending a shock to global remittance companies?
April 27, 2015
Global remittances are projected to total US$608 billion in 2015 according to the World Bank’s Migration and Development Brief from October. Remittance costs are high - the global average cost of sending $200 was estimated at 7.9% (Q3 2014) – and the market is dominated by banks and some specialist players such as Western Union and MoneyGram. Recent M&A activity in this space has been strong with more traditional non-bank FX companies such as Moneycorp, World First, and HiFX all changing hands in the last 18 months at double digit multiples.
However, in recent times new players have emerged to challenge the incumbents. Companies like CurrencyFair, Wolrdremit, Xoom and TransferWise all claim to offer cheaper, quicker remittances - achievable because of their technology-led approach (no large overheads) and peer-to-peer (P2P) business model. These eliminate a large chunk of the costs associated with cross border remittances and currency conversion as can be seen in the example below:
P2P remittance model
In the P2P remittance model Alan is sending money to Yolanda in Mexico and Beatriz is sending money to Zack in the USA. The result is the same but the company in the middle redirects Alan’s payment to Zack and Beatriz’s to Yolanda. No cross-border transaction occurs and therefore traditional fees are avoided.
Significant potential market
And it seems to be working - the cost of sending money decreased over the first three quarters of 2014, driven by technology-led solutions and growing consumer awareness and acceptance of these new methods. However, $608bn is a massive total available market and to fully leverage the P2P model you need a large customer base spread all over the world – cue Facebook.
Last month Facebook announced that users of its messaging app will soon be able to send money to each other. Initially this will be restricted to users in the US, so not great for remittances, but with more than 600m monthly active users (MAU) worldwide the potential is obvious.
International Facebook corridors
The geographic spread of users of its main app is also encouraging when you view them alongside the most valuable remittance corridors. The US to Mexico corridor and US to India corridor were valued at USD$22.81bn and $11.96bn respectively, based on 2012 figures, and represented the first and fourth most valuable. Facebook boasts approximately 151m users in the US, 109m in India and 44m in Mexico, which represent approximately 50%, 9% and 33% of the respective populations of those countries.
Add to this the 700m MAU or so that WhatsApp boasts and you start to get a sense that if Facebook can get even a small proportion of its user base comfortable with transferring money on its platform then it is going to disrupt the incumbent global remittance providers.
Moves by players such as Facebook, and WeChat in China, could drive consolidation amongst the existing more traditional players and turn up the heat on the newer players who might need to raise money quickly in an attempt to grab market share whilst they can.
One thing that all of these players have to deal with is the cost of compliance and regulation that comes with transferring money. Laundering of money and financing terrorism are the two main concerns here and the cost of complying with regulations on a global basis is high. Companies are likely looking for legitimate ways to reduce these costs and a group of new ‘RegTech’ companies might make for interesting acquisitions / ‘acqui-hires’.
It also remains to be seen whether any company will truly be able to dominate this market without local presence in the major remittances locations – USA, Mexico, UAE, China, India, Saudi Arabia and Nigeria. A pure technology play keeps costs low but when it comes to money most people like to know there is someone close by that they can speak to if something goes wrong. The traditional players have an advantage here and it remains to be seen what action, if any, the newer players will take to build out their infrastructure, partnerships and networks.
In my next blog I will be outlining what role digital currencies could play in this market and where we might see deal activity over the next 12 months.
In the meantime, tell us what you think is likely to happen in this market. To what extent do you think the likes of Facebook & WeChat will drive consolidation? How will traditional players react? Share your thoughts below or schedule a meeting to discuss your situation in confidence.