“… 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 on Western Union’s role in international remittances could lead us to think the company has been a successful monopoly in this space forever. Still, with the arrival of some disruptive innovations (“P2P”, “Bitcoin-stablecoin”, “Social”, “Mobile”,…), there is a real danger of its imminent demise. In reality, Western Union’s subsidiary, Western Union Financial Services Inc., began offering international money transfers in 1982, following deregulation. By the mid-90s, Western Union’s coverage included major remittance destinations, such as China. In those initial years, Western Union (renamed “New Valley” in 1991) experienced numerous upheavals, coming close to or even entering 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:
The foundation of PR pitches for money transfer startups centers on a relatively intuitive concept about the role of banks: they are massive institutions with bureaucratic cultures, subpar customer service, and outdated digital capabilities.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 usually behind in service quality and pricing compared to the leading fintech startups. Furthermore, most banks don’t consider a money transfer business 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 incurring exorbitant fees and receiving subpar service 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 has not increased in the last decade. 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 crypto’s disappointing start, and will this innovative technology have a greater impact in the future?
Innovation Adoption: 3 Cases
Consumers and businesses possess trillions of dollars in disposable income that they eagerly spend on various products and services, regardless of whether those products and services 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 requires one Amazon for books, one Spotify for music, and one Netflix for entertainment. After over two decades since Xoom’s founding, the first fintech in this space, two fintechs ended up ahead of the pack. More than a decade of keen observations in this fiercely competitive space has given us a reasonable understanding of what made Wise and Remitly so far ahead of others, 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 for cross-border consumer transfers, surpassing a $10 billion valuation in 2021, and transferring by far more volume than any incumbent or fintech.
Xoom’s two-decade-plus history is full of missed opportunities and second chances. The child of the 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 was clunky and saw little use. The shift to online remittances was expected imminently, so creating an online-only provider with a better user experience was a no-brainer.
“Only when the tide goes out do you discover who’s been swimming naked.”
Warren Buffett
Transfast presents a particularly interesting case among providers of international person-to-person remittances. While we often read about startups or bitcoin taking on the industry’s largest players, Western Union and MoneyGram, Transfast was unique in being, till 2019, an acquisition by Mastercard. This independent, private equity-backed company is between those extremes. Transfast straddled mostly offline with some online business worlds across the globe while being nimble enough to maintain an entrepreneurial / startup culture. Between 2008 and 2016, Transfast grew tenfold, expanding from a narrow focus on sending money between the U.S. and Latin American corridors to a truly global provider. Their story and insights on the industry are quite unique and informative.
This blog is specific to Transfast – if you are looking for more general knowledge on the best ways to transfer money, check other SaveOnSend blog posts.
We will cover questions like:
Should I use Transfast to transfer money from the U.S. to India, the Philippines, Mexico, or China?
How do Transfast’s fees and exchange rates compare with other money transfer companies?
How is Transfast different vs. other online remittance providers?
We will structure this post as follows:
Transfast’s history in money transfer
Transfast’s pricing: fees + FX markup (exchange rate)
Whether or not you should use Transfast for money transfer
Transfast CEO’s views on the money transfer industry and current trends
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