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Xoom Money Transfer: The Disruptor That Wasn’t

Xoom…. think Western Union without the excessive fees…

TechCrunch, Sep 28, 2007

Xoom’s 15-year history is full of missed opportunities and second chances. The child of so-called “PayPal Mafia” and protege of Sequoia Capital, Xoom was founded in 2001 to disrupt cross-border remittances. At that point, Western Union already had a website where customers could initiate and track money transfers, but it seemed clunky and wasn’t attracting much usage. The shift of remittances online was expected imminently, so creating an online-only provider with a better user experience was a no-brainer.

Xoom’s troubles started from the first years with frequent hiring mistakes and allocation of significant portion of resources to a B2B pivot which ultimately failed. By 2007, six years and five funding rounds later, Xoom had evolved to how it is known today: digital-only-consumer-focused providing instant money transfers and great user experience. At that time, Xoom was still a tiny company with less than $20 million in revenues (Western Union did $3.5 billion that year), but the playbook for growth was straightforward: convince as many customers in as many corridors as possible to try its application:

Xoom Money Transfer: Online to India, Mexico, Philippines, China

Xoom Money Transfer: Digital tools

In the following years, Xoom managed to accelerate growth tripling revenues from 2009’s $26 million to 2012’s $80 million. With such performance and being named to the “Top 50” VC-backed companies, Xoom was well-positioned for an IPO: on the first day of trading in February 2013, Xoom stock popped up almost 60%.

Hitting The Wall

Timing for IPO was impeccable as that year Xoom’s growth started decelerating, barely in 2013 but then significantly in 2014:

Xoom change in growth trajectory 2010-2015 Annually

Such change was unexpected and caught post-IPO investors by surprise. Throughout 2013, market still believed in Xoom’s disruptive abilities but, as quarterly results were coming it, by 2014 it became evident that this company is not “the next big thing.” Xoom’ stock started to plummet and quickly reached a below-IPO price, significantly underperforming its main competitors and the broader market:

Bitcoin Money Transfer: 2-year comparison of Western Union and other stock performance vs. S&P500 index

In late 2014, Xoom encountered the huge fraud case which made matters even worse, but was much less important to investors than a long-term performance trend. Throughout 2015, the company performance was getting worse culminating with the first-ever decline in transfer volumes:

Xoom change in growth trajectory 2014-2015 Quarterly

These results were especially surprising as the industry overall continued expanding – Xoom became the slowest growing digital cross-border money transfer provider among well-known players including digital arms of Western Union and MoneyGram:

digital-remittance-providers-yoy-revenue-growth-2016-q2

Which bring us to the current state of Xoom which after all these years of trying to displace Western Union remains a marginal player in the global consumer remittances. Xoom’s revenues are more than 20 times smaller than Western Union’s:

Money Transfer Providers Total X-border Revenue Comparison 2014-2017 Q3

Even for digital transfers Western Union is expanding the lead:

Money Transfer Providers Digital X-border Revenue Comparison 2014-2017 Q3

 

Moreover, Xoom is now facing a new generation of remittance “disruptors” which are, with varies degree of success, repeating Xoom’s journey. One provider in particular, TransferWise, has been especially successful, eclipsing Xoom’s transfer volumes in mid 2015 just after four years in business:

Money Transfer Providers X-border Volume Comparison 2014-2017 Q3

Running Fast Is Not Enough

What did Xoom do wrong to get here? Nothing. It had a formula by 2007 and executed it well achieving the level of success unattainable for the great majority of remittance startups. Understanding importance of superb risk management, Xoom’s leveraged customer data wisely, achieving unprecedented 90%+ approval rate for transfers linked to a customer’s bank account. Xoom also understood that online marketing alone cannot develop a sufficient credibility in order for migrants to trust a new provider with transferring their hard-earned money. So Xoom spent heavily on TV advertising, customizing its commercials for each ethnic group:

Xoom also managed to accomplish all of that without sacrificing its margins (fees + FX markups). Running a quick comparison with SaveOnSend app would show you that Xoom is usually among more expensive providers:

comparison-of-providers-usa-to-mexico-500-bank-to-bank-dec-6-2016

Comparison of Providers: USA to Mexico, $500 transfer, bank-to-bank linked accounts, December 6, 2016

Moreover, Xoom continuously games its FX markups to maximize profits at the expense of a customer peace of mind (unfortunately a common practice among other providers like Western Union, MoneyGram, and Transfast; less so with Remitly and WorldRemit and not an issue with TransferWise):

Xoom Mexico FX Markup till June 23 2017

So the reason for why Xoom hit the wall in 2015 was not because its playbook was irrelevant or it didn’t execute it well. It was because a) Xoom’s playbook did not have a “secret sauce” and b) in consumer remittances, running fast is not fast enough. As we discuss in another SaveOnSend article, there is little differentiation among digital arms of incumbents, a digital provider like Xoom, and more recent Fintech startups. They all use roughly the same techniques to acquire and service customers.

Up until 2013, that didn’t matter as much because droves of tech-savvy-price-sensitive customers were switching from sending expensive wire transfers to using remittance providers. Such senders in USA like migrants from India or younger European expats just needed a small incentive nudge to try a heavily advertised service. But after this en masse switch was completed, all providers had to rely on its deep pockets to buy new customers and for superiority in execution.

The most well-known value proposition for winning share in a highly competitive and homogeneous environment is a lower pricing. While Xoom was hoping to preserve its high margins, other providers including all incumbents dropped their prices in corridors where it made a difference (e.g., USA-to-India). Reluctantly, Xoom eventually followed suit – its FX markups to China, Mexico, and Philippines are twice higher than to India (check with SaveOnSend app), but it just wasn’t enough. Here is how Xoom’s CEO explains losing market share in this corridor (read full transcript from Q1 2015 earnings call on April 28th here):

“I think what’s going on in India is this, starting in Q3 (2014)… we’ve seen one or two or three names selling rupees between 30 and 70 basis points, and those names include Ria, MoneyGram primarily… it’s hard to see how they can consistently stay down at those rates. But, of course, competition can behave irrationally if they want to.”

However, another quarter went by and all providers dropped margins to even lower levels – notice below the change in FX markups between April 1st and August 1st in 2015:

FX margins comparison across providers - remittances from USA to India till July 7 2017

Naturally, at a risk of being completely out of this critical for digital remittances corridor, Xoom’s CEO had to change his mind and right after that April 28th’ statement Xoom’s FX markup was dropped to all-time lows:

FX Markup USA-to-India: Xoom, Q4,2014-Q2,2015

However, since many other providers did the same (e.g., TransferWise dropped its fees for this corridor in October 2015 by 40%), Xoom’s remained far more expensive than its top competitors:

Comparison among money transfer providers for USA-to-India: $1500, Bank-to-Bank, November 8, 2015

Comparison among money transfer providers for USA-to-India: $1500, Bank-to-Bank, November 8, 2015

This resulted in a further share loss (from Xoom’s Q2 2015 report released on July 29, 2015):

“For example, our competitors have offered coupons for free money transfers and, in India, have offered better exchange rates than we have in certain periods and established no fee services. As a result, we have experienced attrition of rate-sensitive customers, particularly those customers who send money transfers to India.”

But how can incumbents afford to “behave irrationally”? It is because 90% of their business is still conducted via cash agents where they earn a higher margin. Obviously, Xoom doesn’t have such fallback option and need to maintain a higher margin in order to avoid burning too much cash. To prevent further loss of market, in late July 2015 Xoom started a bizarre advertising tactic of frequently publishing “best ever” rates – not because Xoom has reduced its FX markup but simply as the result of a higher dollar-rupee exchange rate on the market:

Xoom Twitter Ad - Aug 3, 2015

Xoom’s loss of market share in a critical USA-India corridor continued, so in August 2017 it slashed FX margins for transfers above $2,000… you know, because Xoom cares deeply about so-called unbanked:

When operating on 1% margin leads to a market share loss, it shall give one an appreciation for how competitive digital remittances are. Another vector to consider is how many corridors Xoom had lunched by early 2015. At that time, serving 37 countries out of the US looked like a respectable number, especially since USA residents send around 20% of the world’s remittances. However, it was incomparable with breadth of a digital remittance coverage among incumbents like Western Union (see this SaveOnSend article for more details):

Western Union Online Send Markets - July 2015

And remittance startups like TransferWise, WorldRemit, and Azimo also exceeded Xoom’s number of serviced corridors. By itself, operating just out of the US after so many years in business might be a rational strategy considering the significant upside potential in the world’s largest outbound market. But it does signify a limited energy-ambition among Xoom’s leadership which is probably not what investors expected buying into IPO. By the way, Xoom was aware of these imminent challenges. It was trying to sell the company from mid-2014, unsuccessfully approaching multiple potential suitors.

White Knight on White Horse

The news of PayPal’s acquiring Xoom was not a complete surprise. Having in common not just origins but also investors and board members, this combination was in realm of expectations. However, the acquisition details are incredible. For starters, PayPal paid 80% premium for a company with rapidly deteriorating performance: by early April, Xoom stock was settling around $14, but then acquisition rumors began pushing its stock up. It kept going higher despite the disclosure of Q1, 2015 results that growth in transfer volume dropped to only 6% year-over-year vs. 49% a year earlier. While usually stock zooming up on acquisition rumors get acquired at that acquisition’s day value, PayPal paid another 20%+ on top of that run-up.

Xoom Stock Performance 3 months ending on Aug 3 2015

Moreover, PayPal didn’t try negotiating Xoom’s asking price, even though there was not a single alternative bidder. Finally, PayPal being forty times larger than Xoom didn’t have any urgency in pursuing this acquisition instead of seeing through, for another couple quarters, if Xoom could stall the slowdown in growth. Just imagine where Xoom’ stock price might have been after, in late July, the company announced a decline in transfer volumes.

What could be the rational reason for above? According to PayPal’s CEO:

Acquiring Xoom allows PayPal to offer a broader range of services to our global customer base, increase customer engagement and enter an important and growing adjacent marketplace. Xoom’s presence in 37 countries – in particular, Mexico, India, the Philippines, China and Brazil – will help us accelerate our expansion in these important markets.

Each explanation in this statement is inaccurate. PayPal is already offering cross-border money transfer to consumers and doesn’t need Xoom to start offering this service. PayPal is simply choosing not to compete aggressively in this space by maintaining a relatively high FX markup. By the way, this is exactly why Xoom planned to continue operating as a “separate service” after PayPal’s acquisition. Why wouldn’t PayPal offer a convenience of a single platform for all possible customer needs? Similarly to its approach to Venmo, PayPal wants to preserve high margins for its core business-related transfers.

It is equally puzzling why PayPal’s acquisition of Xoom would “increase customer engagement.” We already discussed Xoom’s market share loss, but even among it existing customers the average transfer amount has dropped 17% over a year prior to acquisition. How exactly could PayPal benefit from this track record?

Finally, as we covered in another SaveOnSend article, Xoom does not have a real presence in other countries. Fundamentally different from providers with local field offices, Xoom has contracts with local banks or retail chains to distribute funds and, in some countries, Xoom even works via 3rd parties like Earthport to obtain such service. How would those contracts with Xoom “accelerate” PayPal’s own expansion in those markets and, in that case, why wouldn’t PayPal just sign its own agreement with intermediaries like Earthport? Wouldn’t that ensure a much faster expansion and be much cheaper than spending almost one billion dollars?

So how is the acquisition working out so far? In 2016, Xoom’s revenue was around $200 million. Which is only 10% more than in 2015. In November 2017, Xoom tried to put a positive spin on its performance citing vanity metrics but not a word about its revenues or transfer volumes. Behind such anemic growth is a lazy focus on USA only. By late 2017, Xoom had 67 destinations, adding one destination in Q1, 2017 and 11 more in Q2 and Q3… 30 more destinations vs. 2015 seem great except every single one was USA-outbound. Can you guess an impact of a country ranked #67 on Xoom’s $8+ billion in annual volume transfers? Assuming Xoom earns a massive 20% market share in that corridor, it would represent 0.2-0.4%:

USA outbound countries ranked 60s

Source: http://www.pewglobal.org/interactives/remittance-map/

In October 2016, 11 months after completing Xoom’s acquisition, PayPal integrated the workflows offering Xoom as one of the transfer options:

Initially, PayPal customers would see more options, but for the actual transaction they would still have to go to Xoom’s application.

paypal-usa-to-mexico-oct-19-2016

Meanwhile, Xoom has significantly decreased its marketing activities. Before PayPal’s acquisition, Xoom was the master of both paid online ads and SEO, earning #1 spot in the world’s most advanced remittance corridor, USA-to-India:

Money Transfer: Customer Acquisition, SEO vs. Ads, May 2, 2015

Money Transfer: Customer Acquisition, SEO vs. Ads, May 2, 2015

Compare it with the picture today. Saving on digital marketing is great for profitability, but unless PayPal becomes its top channel Xoom’s $1.1 billion price tag seems excessive.

By the way, similar doubts are applicable to a majority of acquisitions. Let’s consider Xoom’s competitor Ria Money Transfer and its acquisition of XE.com for $0.2 billion in 2015 in order to juice up its digital acquisition channels. Consider Ria performance starting 2014:

Ria Money Transfer Performance 2014 - 2017 Q2

Seems like a continuous growth story, right? Now, look closer at quarterly changes in growth rates:

Ria Money Transfer Annual Change 2015 - 2017 Q2

You can notice only a significant decline in growth rates but also no change since XE acquisition. CEO of Euronet (Ria Money Transfer’s parent company) explained the reason on July 26, 2017:

Ria Q2 Earnings Call Quote about XE conversion

In Conclusion

Thank you for reading. As with all of our analyses, this article will be regularly updated so please check back with us frequently or after big news. If you think we got anything wrong or if you know why PayPal really acquired Xoom in such unusual way, please share your thoughts in the comments section below.

  • PK

    Hello,

    How do you track the FX mark-up rates over time? Is this publicly available?

    Thanks for the help.

    • Hello PK, thanks for asking – it is not. We do it ourselves.

  • Agudeza

    I didn’t see this article until today but I was suspicious of the PayPal agenda when I first heard about XOOM and learned PayPal was the mothership. I have used PayPal for several years. It has become somewhat of a standard for most online businesses when it comes to making financial transactions.They have a buyer protection policy that is second to none. But when I needed to find a resource for sending money abroad, I did not pay much attention to how costly it was

    • Hello Agudeza, thank you for reading our article and such extensive comment. We are also curious how PayPal and Xoom decide to integrate their offerings. For now, they seem to remain as two separate entities. Just keep in mind that there are massively more people who trust Western Union more than Xoom and/or are not even aware of PayPal/Xoom’s existence. So Western Union might remain the remittance industry leader for a while. Please read our analysis here and let us know what you think: https://www.saveonsend.com/blog/western-union-money-transfer/

  • Bruno Azemi

    Hi,

    Do you guys offer consulting services for remittance industry?

    Thank you…

    • Hello Bruno, thanks for asking! SaveOnSend is a nonprofit, and we would be happy to advise for free if it is a simple question. For a larger hands-on engagement, we would give you the right contacts depending on a topic. Shoot us an email with details at the adress listed on the top of this page.

  • awaaz

    Hey,

    How did you get the GSV values for XOOM and the private companies in particular.

    Thanks.

    • Hello Awaaz, they are from both public sources and connections on the inside. Till late 2015, you can find Xoom’s financials; bigger London-based startups have to share data via Companies House; sometimes companies mention GSV in a blog or via a twit, etc. …. plus lots of triangulation/extrapolation on our part. Thanks for reading.

  • Raoul Duke

    Hey,
    How did you guys get the post-acquisition Xoom revenue numbers and cross border volume?
    Thanks!

    • Hello Raoul, thanks for asking. Revenue comes from SEC filings, analyst calls, and other sources, e.g, from 2016 10K: “…Xoom transaction revenues contributed two percentage points to the 2016 growth rate…”. Cross-border volume is then easier to deduce because we monitor providers’s fees and markups across corridors and we know average transfer amounts for each corridor. Please keep us in mind if you come across different or better data. Thanks for reading our blog.

  • abhaymicrofinance

    Thats a well written article. I appreciate the analysis and insight.

    In a world filled with riff raff articles .. You my dear friend are gold standard.

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