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The banking industry has changed gradually over the course of time, but the advancements of technology are forcing it to evolve even faster. For many decades, banks had no problem in dominating the money transfer market, but the new challenges are serious and those who don’t adapt will be swept away by the flood. Relatively small web based organizations are fragmenting the industry and their money transferring solutions are increasingly appealing to those who need to transfer cash beyond borders.

Screenshot of Western Union's Homepage.
Screenshot of Western Union's Homepage.

Large companies such as MoneyGram and Western Union still dominate the industry, but their operating costs are no longer regarded as acceptable by clients. What has changed is the fact that people now have real alternatives and the new companies such as TransferWise and Halo Financial challenge the status quo by providing cost-effective solutions. The banking industry is disrupted by these new technologies and the online international money transfer companies have momentum on their side.

How can the global money transfer industry be structured?

The global money transfer industry can now be divided into three main groups: Fintech which stands for financial technology, established money transfer operators and the blockchain. The former is the one growing at the fastest pace, by using the aforementioned disruptive technologies to appeal to those who want to drive down the costs. They have diversified their portfolio and now focus on various financial activities, ranging from payment services to banking and wealth management.

Screenshot of MoneyGram's Homepage. © MoneyGram
Screenshot of MoneyGram's Homepage. © MoneyGram

Banks and major players such as MoneyGram and Western Union lead the pack and they have the advantage of continuity and access to significant resources. They respond to the challenge posed by Fintech companies by investing more money in innovation, but their sheer size makes it more difficult for them to adapt. Far more experienced than startups and capable of dealing with increased regulations and the high costs of doing business, they still dominate the industry but their position is in jeopardy.

A glimpse into the future

Last but definitely not least, the blockchain is still in its infant stage and it’s hard to predict the manner in which this technology will evolve. It spends a lot of time in the spotlight thanks to its low costs for most financial activities, but is yet to convince the broad audience. The blockchain is regarded as a serious threat to big banks, who are also exploring the technology in an attempt to find a solution to the problem before it becomes an emergency.

Non-bank global money transfers can also be divided into international payments specialists and consumer remittance providers. Roshan Polepalli (VP, Transfast) highlights the differences in his presentation, by focusing on the targeted audience. International payments specialists provide solutions to businesses and big companies dealing with foreign exchange. Their average payments exceed €10,000 and challenge big banks whose transfers lack transparency and provide the service at higher cost.

Meanwhile, Consumer Remittance Providers serve mostly workers who send money back home and the average remittance size revolves around $300. This is the segment dominated by MoneyGram, Western Union and Ria, but all of these companies have high operational costs that reflect on the money transfers. This is the niche that smaller players are taking by storm, while facing challenges of their own, such as compliance requirements and surging regulatory costs.

How big is the global remittance industry and what are the world’s biggest money transfer markets?

Global Cross-Border Remittance Volume. Source: The World Bank © BI Intelligence
Global Cross-Border Remittance Volume. Source: The World Bank © BI Intelligence

Modern transfer services are today offered by companies using different technologies to dominate a massive global industry. Nearly $600 billion was remitted worldwide in 2014 according to the World Bank, with the US sending most of the money, while India receiving the largest amounts. There are different categories of companies offering remittances, with the industry being dominated by MTOs and banks. Digital players try to disrupt this pattern and use the latest technologies to drive down the costs.

The global remittance industry is huge and the US is the country sending the most money beyond borders, mainly to Mexico, China and India. Saudi Arabia, the UAE, the UK and Germany come in second and most money is being sent to India overall. With more than $70 billion per year, India is followed at a distance by China, the Philippines, Mexico and Nigeria.

Top 5 Remittance Sending Countries. Source: The World Bank 2014. © Penser Consulting Ltd. 2015
Top 5 Remittance Sending Countries. Source: The World Bank 2014. © Penser Consulting Ltd. 2015
Top 5 Remittance Receiving Countries. Source: The World Bank 2014. © Penser Consulting Ltd. 2015
Top 5 Remittance Receiving Countries. Source: The World Bank 2014. © Penser Consulting Ltd. 2015

How are the global remittance prices developing?

With only a handful of Consumer Remittance Providers dominating the industry, the average cost of sending remittances was stable for many years. Over the last couple of years, studies suggest that these values are dropping and the World Bank came up with promising figures. Last year the cost of sending remittances from G-8 countries decreased and the drop was particularly sharp in the last quarter of 2015.

At the time of writing, commercial banks are the most expensive of all providers, followed at a significant distance by MTOs. Post offices are not far behind, but they are still no match for online services such as World First and HiFX which are the least expensive. Since they have lower operational costs, it is only fair to assume that this can grow into a fully fledged trend and these companies will be able to offer even less expensive services.

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How does remittance money transfer work?

While many people use remittance money transfers, very few understand this relatively simple process. There are significant differences between the traditional model and the prepay counterpart, with the latter being faster and less expensive.

During a conventional remittance money transfer, the client gives the desired amount to the money transfer operator, which then transfers it to the settlement bank. This operation is performed once per day after all the clients have deposited the money they want to send beyond borders. The settlement bank then transfers the money to the remitting bank and the entire amount is transferred to the receiving bank in the country of destination.

Once again, the money is transferred to the settlement bank in the beneficiary territory, where it is converted into local currency and the MTO is notified. In the final step, the money transfer operator will distribute the money via cash over-the-counter services or using direct bank deposits. The process is kind of long and tedious, but the worst part is that it also carries high fees.

The Prepay model is less expensive and faster because both parties trust each other with money in advance. The MTO places the advanced deposit so the cash is available to the partner in the beneficiary territory. When the client makes the deposit, the receiving bank will provide the conversion rate and the money transfer operator can immediately forward the money to the settlement bank. The recipient doesn’t have to wait for several days and the transaction costs are also lower.

What is peer-to-peer money transfer?

Screenshot of TransferWise's Homepage. © TransferWise
Screenshot of TransferWise's Homepage. © TransferWise

Peer-to-peer money services such as TransferWise and TransferMate are supposed to circumvent the big banks and match people who send money, with those who receive cash. This industry is growing fast and with peer-to-peer money transfer services operating on a global scale, cash can be transferred virtually anywhere on the globe. These companies use the Internet to perform transactions, which speeds up the process and decreases the cost.

Speaking of which, the commissions charged by MTOs are smaller when the companies have a large customer base. This is the consequence of peer-to-peer money services requiring a balanced community, with roughly the same number of people sending and receiving money. The money transfer operators simply match the senders and recipients, thereby reducing the costs of exchange rates.

Who are the leading money transfer services?

Screenshot of The FX Firm's Money Transfer Homepage. © The FX Firm
Screenshot of The FX Firm's Money Transfer Homepage. © The FX Firm

Banks have the advantage of being large entities, offering easy services and their sheer size makes them more credible. They have the downside of being expensive and rather slow compared to digital players such as The FX Firm and Global Reach Partners and some of the money transfer services startups.

Traditional MTOs come in second and they are responsible for transferring huge amounts worldwide, with Western Union being the uncontested leader. They are also trusted by the broad audience and their services are relatively easy to use.

At the opposite end of the spectrum we have brokers, which are preferred by savvy users who focus on minimizing the cost. Their services are used by those who transfer big amounts, but their complexity makes them less appealing to regular people.

Peer-to-peer companies that opened shop over the last couple of years are somewhere in between, with intuitive services and low cost. Blockchain networks are regarded by many as fringe operators, as they use revolutionary technology and offering the absolute fastest and cheapest money transfers. The downside is that they don’t enjoy the same trustworthiness as big banks and traditional MTOs.

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What trends can be seen in the international money transfer market?

The evolution of International Payments Specialists and Consumer Remittance Providers are two of the trends identified by Roshan Polepalli. The former have emerged as a low-cost alternative to traditional banks, by using technology to keep the costs low while making the money transfers more transparent. They appeal to affluent consumers who need to transfer larger amounts and who are particularly concerned about paying less on each transaction.

International Payments Specialists have established a beachhead and by intelligently using SEO and SMO techniques, they build a name for themselves online. This has proven to be a highly effective way of acquiring customers with low costs and this niche has plenty of room to grow.

One of Moneycorp's Bureau de Change. © Moneycorp
One of Moneycorp's Bureau de Change. © Moneycorp

Consumer Remittance Providers are tapping into the accelerated growth of the industry, caused by migrant workers sending money home. Western Union and MoneyGram have been dominating the consumer remittance niche for decades, but they are under threat by companies using mobile and online solutions such as World First and Moneycorp. The latter charge lower fees and speed up money transfers, effectively eating away at the profits of the two industry giants.

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