The existing money transfer players – Western Union, Moneygram, banks – have no incentive to innovate because online money transfer model will significantly change their existing mostly cash based walk-in business model. It’s very unlikely that any innovation will come from them. For example, it will significantly disrupt an agent network for Western Union. Even if they have technologies, resources and ideas the existing money transfer giants hold it back. It strongly reminds of Kodak – the company, which invented digital camera but hold it back being afraid that digital technology will affect its film based business.
There are probably more than 50 startups on the red-hot market of online remittance working on worldwide scale and even more than that on the local. Most of them are unknown startups you’ve never heard of and never will. Some of the most known names are Transferwise, Azimo, WorldRemit, Zoom (PayPal division).
The major challenge for online money transfer startups lays in establishing trust and brand recognition. In the crowded market, marketing becomes very expensive and hard to do. Almost none of the online money transfer startups have ever been in black. Even the most prominent ones such as Transferwise and Azimo are reporting losses years in a row explaining it with the need to expand and grow. Even the relatively mature Xoom under PayPal umbrella continues to report losses.
Another major challenge for remittance startups is technology and infrastructure. It’s impossible to be in a money transfer business today and not rely on the infrastructure owned by banks. The large portion of the money providers also relies on well-known APIs providers such as CurrencyCloud and TransferTo. You really can’t make it cheaper or faster or give customers better rates if you rely on 3rd party provider infrastructure. The key benefits the customers want are almost impossible to improve on unless you’re doing direct partnerships and agreement and building your own infrastructure that means huge upfront costs.
Some companies are hiding their fees by inflating the exchange rate against what is called mid-market rate or fair rate. It’s entirely possible to give customers rate even below the mid-market rate if you can create direct partnerships with the banks and other currency sellers and buy the currency in large quantities.
Customers want better exchange rates, lower fees, faster service. They are reluctant to try the new service unless they heard about it from multiple sources family and friends, online, TV and newspapers. Which is understandable because trust plays the deciding role in the customers’ decisions to try or skip the service. This means huge marketing expenses for the money transfer companies and insane cost per acquisition (CPA) that doesn’t correlate well with customer lifetime value (LTV). Most companies are making money on fees per transaction but the problem is most customers don’t send money on a regular basis it’s not like SAAS app where users are predictably paying monthly subscription fee – maybe bimonthly maybe once every few months.
It’s tough to create an ideal UX for the customers as money transfer process involves filling out a lot of forms and information. The underlying money transfer technologies often don’t provide reliable way to track status of the transaction, which usually leads to lots of customer’s complaints about the delays. There are also regulatory compliance where the company should obtain a remittance license in every country it operates and implement a set of anti-money laundering and anti-fraud requirements such as Know Your Customer and Anti-Money Laundering.
Money transfer startups require a lot of funding to support its marketing and brand recognition efforts; to be become really successful they need to invest in their own technology and infrastructure. From the business point of view, the small players are not going to survive in a highly competitive/high expense market where market share directly relates to revenue and profits.