International Money Transfers and Challenges Facing the Industry

The international money transfer industry is a booming, thanks largely to an integrated global economy. Several leading companies dominate the industry such as Western Union, Transferwise and Xoom, although many smaller international money transfer companies are coming into the reckoning too. While Western Union remains a market leader, it is fraught with challenges, notably slow growth and decreasing market share.

For its part, Transferwise operates on low margins and a mass scale. Over the years, international money transfers have been associated with high costs, hidden fees, and slow transfers. Unfortunately, the industry is characterised by a ‘value chain’ geared towards middlemen, each of whom is tacking on fees and charges to increase the costs for senders.

In recent years, the industry has been turned on its head by the arrival of competing money transfer companies determined to fast-track international money transfers between senders and receivers. Now, individuals and SMEs can easily transfer vast sums of money across international borders at lower rates than ever before. These are true value-added services and are notably different to the services provided by banks and Bureau de Change operators.

It is estimated that the forex market is made up of approximately $4.8 trillion in daily transactions. This massive industry dwarfs the value of all stock markets combined, making it an important contributor to the global economy. To be clear, international money transfer operators are typically non-bank entities. They are licensed and regulated by local, regional, or national agencies and they are subject to the rule of law.

Case Study: OFX OzForex Stock

Source: OFX Group Limited (OFX.AX) Yahoo Finance

OFX, formerly OzForex is an established Australian money transfer organization. It launched in 1998 and now features offices around the world in 6 countries. The company headquarters are in San Francisco, California. This money transfer service wanted to facilitate global financial transfers at cut-rate prices with full transparency of operations. The company has made a total of $125 billion in AUD transfers with some 3,250 daily transfers in major currencies. There are some 115 global bank accounts in the network, and some 55 currencies currently offered.

The stock (OFX.AX) is traded on the ASX (Australian Securities Exchange) and is currently priced at $1.55 with a 52-week trading range of $1.4050 and a high of $2.4700. It has a 1-year target price of $1.81. The company has generated consistently positive revenues  and solid earnings since 2016. Figures in excess of $110 million have been reported (revenue) and earnings hovering around $20 million. Analysts give this stock an overall buy rating with a minority underperform or hold option.

Under the Microscope: International Money Transfers

The way an international money transfer works differs to domestic transfers. For starters, these transactions take place in different countries with different currencies, and different rules. A money transfer operator facilitates the transfer of funds from Country A to Country B. The sender will provide funds and details of the recipient, transfer funds from his/her bank to the money transfer operator which corresponds with the recipient’s bank to make the payment to the receiver.

There are notable developments taking place in the money transfer industry, notably the declining fees as a result of FinTech operators replacing banks and established financial institutions. These international transfers a.k.a. remittances are made up of transfers in cash and kind, and payment for services. The World Bank estimates that the total value of remittances in 2016 breached $530 billion with a compound annual growth rate of over 10% since the year 2000.

Clearly, the money transfer industry is growing at a serious clip. Here’s an important statistic: the cost to senders averaged 7.21% of the principal amount of the money transfer (third quarter 2017). While high, it is significantly lower than the comparative costs back in 2008 of approximately 9.5%. Senders are benefiting from these reduced costs, and it’s thanks in large part to the growth of the non-bank international money transfer operators which now populate the market.

The United Nations and the G 20 have been working tirelessly to reduce the costs of international money transfers, and their work is paying dividends. Many low-wage workers send vast sums of money abroad, and they are the ones struggling with the fees and commissions. Banks are being compelled to drop their costs, given that they charge on average 11% more than the value the recipient is getting. Money transfer operators on the other hand average out at around 6.1%. The countries with the greatest money transfers (2016) include the following:

• The United States at around $65 billion
• Saudi Arabia at around $38 billion
• Switzerland had around $25 billion
• Germany at $20 billion
• China at $20 billion

In terms of recipient countries, India tops the list by a long margin, followed by China in a distant second, the Philippines third, Mexico, and France. It’s interesting to point out that Western Union has double the market share of its nearest rival, UAE exchange. Many FinTech start-ups have entered this lucrative arena and are making headway, although they pale in comparison to the top three market leaders. The top 5 providers of international money transfers include Western Union, UAE exchange, MoneyGram, RIA, and TransferWise. Positions 5 – 12 are occupied by JPMorgan Chase, Bank of America, Wells Fargo, Xoom, Citibank, Transfast, Remitly and Worldremit.

All of these companies are feeling the pressure to reduce their costs and make it easy for money transfers to take place. While many folks believe that money transfers are the mainstay of banking operations, they really aren’t. Banks are so diversified that international money transfers are but a small component of their overall revenue streams. However, international money transfer operators rely 100% on this activity to generate their revenues. These companies split their revenue into two components notably the spread (the difference between the buying price and the selling price), and a transaction fee. Western Union’s revenues were made up of 27% spread and 70% transaction fee (2016 studies).

Making the case for Western Union and TransferWise

It comes as no surprise that Western Union and TransferWise are facing increasing pressure to reduce their costs to make money transfers more accessible to the masses. Western Union in particular has been associated with declining revenue growth and falling fees since 2012. For example, their forex revenues were $1333 million in 2012 and their fees amounted to $4210 million in 2012.

Fast forward to 2016, their forex revenues amounted to $1490 million and the fees were markedly lower at $3795 million. With pressure from the UN and the G 20, money transfer companies are looking for inventive ways of drumming up revenues for their businesses, while also providing competitive pricing for their customers. It hasn’t always worked out well and Western Union is a case in point. In 2016, Western Union’s transfer volume exceeded $80 billion, dwarfing its nearest competitors by a long margin. Unfortunately, Western Union is too big to adopt streamlined systems and it is paying the price as customers shift to other operators.

Transferwise presents as an interesting case study.  It is highly competitive in terms of pricing, and it is scaling towards significantly increased user numbers. This FinTech company is a power player in the industry. It is privately owned and headed up by an Estonian-based venture capitalist company. It currently has a 10% + share of the UK market and has raised hundreds of millions of dollars in capital over the years. This private company has a valuation in the billions, with several rounds of funding successfully completed.

This company works on razor-thin profit margins, yet it remains a successful entity. It does not generate any income on its forex spread. It only generates income on fees that it charges clients. And these fees are competitively priced. The Transferwise model is unique in that the company claims to match sellers and buyers so that no actual currency needs to change hands with third parties in the interbank market. The efficacy of such a system is in question, since it is debatable whether bilateral transfers are effective when money is sent one way or the other.

Consider that companies like TransferWise charge fees of approximately 0.5% for the cable (EUR/USD), making this a highly desirable option for senders. It does not appear to be a sustainable business model given the low fees and the high costs of maintaining operations. However, TransferWise is a purely electronic-based model with no physical infrastructure or agent bureaus.

It appears that TransferWise has become an efficient business, with an ability to fully vet transactions, safeguard them, and effect transfers with no hitches. TransferWise recently launched a ‘borderless account’ which is a system of virtual bank accounts. It is expected that NFC pay services or physical cards will come next. This will allow TransferWise to increase its range of business offerings to include day-to-day transactions with attendant fees and commissions for the company. Thanks to governments around the world, TransferWise is filling a niche in the market by offering low-cost international money transfers where banks have failed to toe the line.

How Is Blockchain Technology and Cryptocurrency Affecting Money Transfers?

Blockchain technology burst onto the scene years ago with Bitcoin and has exploded in popularity. The blockchain is a transparent, secure, rapid and cost-effective network for transferring value propositions from Point A to Point B. It is immutable, secure, and highly effective at negating all the costs imposed by middlemen, banks and other financial institutions. Blockchain also users cryptocurrency rather than fiat currency, calling into question the whole financial system as it stands. By using digital currency for value propositions, there is no underlying need for central banks and established financial institutions to give value to money.

This demand/supply model works because everyone on the blockchain serves as a node to help the transactions process along the chain. Blockchain technology is effectively the best way to transfer money from point A to point B with minimal cost and maximum speed. For example, someone wanting to transfer Ethereum, Bitcoin, Bitcoin Cash, Ripple, or Stellar can simply do so through a secure cryptocurrency exchange and an encrypted wallet. 1 Bitcoin (BTC) can easily be transferred from an individual or a company in one country to another and be received within double-quick time. The transactions fees are negligible, and the conversion into the recipient’s currency can take place at the crypto exchange on the other side of the world, or simply held in BTC.

The adoption of crypto technology is still in its infancy stages, given that many people in developing countries are not familiar with this system, and they tend not to trust digital value over tangible coins and cash. Nonetheless, blockchain is making tremendous strides in the international money transfers industry and will likely power the way ahead.