The foundation of money transfer startups’ PR pitch centers on a relatively intuitive concept concerning the role of banks: they are massive institutions with bureaucratic cultures, subpar customer service, and outdated digital capabilities. Consequently, it’s only a matter of time before banks are displaced from the cross-border money transfer industry. Ironically, this premise holds. A typical bank is notably behind in service quality and pricing compared to the leading fintech startups. Furthermore, most banks don’t consider a money transfer business to be strategic.
Since the publication of “Bitcoin: A Peer-to-Peer Electronic Cash System” in 2008, international money transfers, although constituting a smaller portion of cross-border payments, have emerged as one of the most promising use cases for crypto.
The initial assumption was that remittance users were experiencing exorbitant fees and subpar services from traditional players like Western Union. The prospect of an almost cost-free and instantaneous blockchain-based solution appeared to be a much-needed relief. Additionally, it presented an opportunity for affluent individuals in Western countries to showcase their efforts toward promoting financial inclusion in developing nations.
Subsequently, many startups received funding to test this hypothesis with consumers and partner with money transfer operators (MTOs). Additionally, one country recognized this as a national priority and encouraged its citizens to explore cryptocurrency-based remittances.
Despite this, the adoption of cryptocurrencies for remittances is lower today than a decade ago. Using crypto for international money transfers remains a pilot or pay-per-play. More importantly, nobody can articulate an in-depth case for using private, public, or government crypto instead of or on top of Swift + local real-time rails.
In contrast, non-crypto fintechs such as Wise and Remitly have emerged among the global leaders. What factors have contributed to the disappointing start for crypto, and will this innovative technology have a more significant impact in the future?
Innovation Adoption: 3 Cases
Consumers and businesses possess trillions of dollars of disposable income that they eagerly spend on various products and services, regardless of whether they are beneficial. For instance, consumers collectively spend around a trillion dollars annually on alcohol, junk food, or tobacco. Introducing genuinely innovative technology is an even more straightforward proposition. Financial services and insurance companies allocate a trillion dollars annually to technology spending alone. Apple generates $200 billion just from iPhone sales. While generative AI is still in the early phase, Nvidia’s annual sales of AI chips have already reached $150 billion. To achieve similar success, blockchain technology only needs to address one of the three following use cases:
For disruption to occur, it only takes one determined startup with a long-term vision spanning two or more decades. The disruptive force of innovation only required one Amazon for books, one Spotify for music, and one Netflix for entertainment. After over two decades since the founding of Xoom and over a decade since the launch of Wise (formerly TransferWise), the cross-border money transfer industry still does not know which fintech company will be such a disruptor. However, a decade of keen observation in this fiercely competitive space gives us a reasonable understanding of which ones still have a chance, which ones don’t, and why some fintechs are no longer around.
Do remittance startups have a fundamentally different cost structure vs. incumbents? What are the primary customer acquisition channels for money transmitters? What can explain remittance startups’ massively higher relative valuations vs. established providers? If you are interested in such questions, this article is for YOU.
“Revolution is a rough business. You can’t make it wearing white gloves and with clean hands”
Lenin
Wise’s (ex-TransferWise) origins are often described as follows: Two Estonians, a former Skype employee, and a Deloitte consultant, became fed up with the exorbitant fees charged by banks for money transfers from the UK to Estonia. Fueled by their frustration, they had a stroke of brilliance – matching remittance senders and receivers within the same country. With a sauna in their office and a team unafraid to challenge the banking industry, TransferWise was born. The startup received backing from prominent investors such as Peter Thiel, Richard Branson, and Ben Horowitz, propelling it to the pinnacle of fintech consumer cross-border transfers, surpassing a valuation of $10 billion in 2021.
“… long, sorry decline has left the 140-year-old company a shell of its former self. Today, it is fighting for its very survival. Western Union fell victim to technological advances…”
Reading current reporting about Western Union’s role in international remittances could make us think that the company has been a successful monopoly of this space forever. Still, now, with the arrival of some disruptive innovations (“P2P”, “Bitcoin-blockchain,” “Social,” “Mobile,”…), there is a real danger of its imminent demise. In reality, Western Union’s subsidiary, Western Union Financial Services Inc., began providing international money transfers in 1982 thanks to deregulation. By the mid-90s, Western Union’s coverage included major remittance destinations like China. In those initial years, Western Union (renamed “New Valley” in 1991) had plenty of upheavals going near or into bankruptcy. After changing hands a few times, the money transfer subsidiary was resurrected as an independent entity in 2006. Western Union’s stock performance has been highly volatile ever since, dwarfed by the overall market:
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