Picking Winners in the Great Remittance Disruption
Remittances are big business. This year, customers will send $454 billion to developing countries through formal channels alone. Developing countries’ income from remittances is three times bigger than the global aid budget. If you exclude China, remittance flows even outweigh foreign direct investment.
However, remittance services have never been known for great customer experience. Here’s why:
First, they’re expensive. At the end of 2014, the global average cost of sending remittances was just under 8% of the value sent. For less popular remittance corridors, rates climb well into the double digits and can reach over 20%.
Second, they’re inconvenient. Coordination between senders/receivers, locating branches to send and receive cash, paperwork and red tape, and long lines – these and other factors often make the experience of sending remittances pretty miserable.
But the world is changing. A convergence of forces offers the opportunity to rethink the traditional remittance model, promising more money, time, and peace of mind for customers. What’s new?
- New technology. Cell phone penetration, mobile money, and the internet permit remote digital access to financial products in a way never before possible.
- New money. Cryptocurrencies like Bitcoin and related protocols like Ripple offer instant, point-to-point value transmission. This opens new possibilities for customers as well as alternative payment channels for providers, who have traditionally had to work through a highly intermediated correspondent bank network.
- New distribution. On the sending side, customers can manage transfers from their phone or PC without ever leaving their seats; on the receiving side, customers can have transfers land in mobile money accounts or as gift cards to be spent locally, as well as simply having their bills or purchases paid for directly. Cash is still important, but there are alternatives. Many recipients never need to actually hold currency in their hands.
- New players. The game is not dominated just by Western Union and Moneygram anymore. Incumbents are being challenged by a range of high-growth, well-funded new players, like Xoom (which went public in 2013), Transferwise, WorldRemit, Azimo, and others.
The opportunity to “disrupt remittances” has become fintech’s honey pot, luring entrepreneurs of all kinds to join the party and see if they can offer better pricing, better service, better experience, better everything. In the last couple of years we’ve learned about dozens of new entrants, including (alphabetically): Abra, BitPesa, BitX, Chapulin, Hellobit, Instarem, iSend, Kipochi, Kitiwa, Kwanji, Kwikremit, Mergims, Neema, Niokobok, Quippi, Regalii, Remit.ug, Remitix, Remitly, Saldo.mx, SikaCash, SimbaPay, Tawipay, Volabit, Wave, Willstream. No doubt, there are others as well.
As investors, we’ve looked at dozens of pitch decks from these and other companies. Most of them start the same: “Western Union is gouging customers! Prices can be, will be lowered!” Yes, we agree – and most exciting, all of this promises benefits for the global poor and underserved (many of whom are active money transfer users), who will have options that are cheaper, better, faster, nicer, and more transparent.
But as investors, we’re finding it hard to back any of these opportunities – at least at the seed or startup stage. Why?
- Remittance companies are all about trust; trust is all about brand; and brands are expensive. It’s not that remittances can’t be disrupted, but that’s already happening, with some very deep-pocketed challengers already out in the lead.
- Winning at remittances requires winning at customer acquisition: s/he with the customer wins. But at startup stage, companies have very few customers and are not enough sufficiently established to allow an investor to determine who has legit customer acquisition prowess.
- A lower price is no longer a sustainable competitive advantage. Pricing is a race to the bottom. This is great for humanity, but bad for remittance companies who claim price as their primary differentiator. Startups may undercut traditional players now, but that’s probably not defensible long term. An established player like Western Union can simply cut prices when specific markets, like the U.S. – Philippines corridor, grow crowded. The battle will likely be won on better customer experience, convenience, and brand – in addition to a great price.
- Cryptocurrencies like bitcoin may benefit the well-funded challengers more than startups. Traditional companies like Western Union and Moneygram may not easily figure out how to use these new currencies, given their legacy systems, but the more established among the newer players, like Transferwise, Xoom, and Azimo, are poised to take advantage of the cost and speed advantages of cryptocurrencies on the back-end, regardless of whether they choose to make them a direct part of the customer experience. Startups can do this too, of course, but we doubt a startup can create sustainable competitive differentiation on the use of cryptocurrencies alone.
- Similarly, user experience and design is very important, and we’re seeing great examples, but it’s not clear this can be a source of long term competitive edge without brand and distribution.
- Finally, many of the strategies we’re seeing will be hard to scale (a pre-requisite in a high volume, low margin business like remittances):
- “Directed remittances” (e.g., remote bill pay, airtime purchasing, gift cards) may not get to scale quickly enough to result in viable businesses, because of reliance on local retailer, utility, and/or product distributor partnerships.
- Players focused on sending remittances to mobile money accounts will only be able expand in those markets with robust mobile money ecosystems. However, few markets outside Kenya and Tanzania are ready for this, so scale will come slowly.
- Overall, remittance concepts with limited use cases or specialized corridors may never achieve escape velocity. The very things that make remittance startups valuable in specific markets make them less scalable and transferable: signing on local vendors, integrating with local partners, targeting local users or customers who are part of a specific diaspora. And nothing prevents competitors from doing the exact same thing.
There will no doubt be some sizable winners in remittances – companies who break through the clutter and customers who benefit from superior products and lower prices. Capturing even a small slice of the remittance market could be very lucrative indeed. Ultimately, though, the winners will likely be the ones to break through on brand, customer acquisition (and how this compares to repeat usage and lifetime value), customer experience, and execution, not just price. These can be very hard to predict at a startup stage (when we at Venture Lab invest), before the real work has begun.
It is indeed a good article and I do agree on many points but I caution readers, as I caution all the start-ups, emerging remittance services and innovative disruptors who come to our IMTC Conferences, that the "sad picture" that it is painted about the money transfer industry is not very real. The industry is not dominated by the big two, but by hundreds of dedicated remittance providers that cater to migrants in every corner of the planet and have around 70% of the market. There is a lot of competition and even if prices are high is mostly because providing the service is complex, costly and has many component parts. Regulation, Compliance, fraud, liquidity, technology, access to banking by remittance providers, are all reasons why the service is costly. And it is naive to think that disruptors are not going to face those same challenges. There are many opportunities open in dozens of corridors, but I hope less mistakes are made thinking that we know what the consumer needs without really testing, getting involved, walking the streets, partnering with firms that know the culture, the mentality, the needs, the uses. Yes, the battle will likely be won on better customer experience, convenience, and brand – in addition to a great price; but is the customer that will determine that and a lot of money will be lost by people thinking that they know what is best for the masses.
One other thing that creates significant risk for remittance players is the volatile world of regulation, particularly AML. While some of the non-bank players may be able to fly under the radar for a while, regulator requirements will catch up fast once a terrorist group determines the possibilities for layering of payments distributed across multiple remittance payment providers. I suspect that this challenge, and the associated Know Your Customer and ongoing activity monitoring requirements, will continue to create cost challenges for all but the largest players.
Very interesting article ! thanks. I discovered new means to transfer money and some of them are efficient. Anyway you are right, brand is important. But in the future the brand might not be the most important point, neither the confidence. I think the service could be improved by making interactive and/or thematical transfers, which is possible thanks to cryptocurrencies.
Hugo and Graham, according to your experience do you think I might be right?