While Western Union and other remittance giants have made strides to build allegiance among immigrant populations, a legion of nimble start-ups are steadily eking into their space – offering reduced rates and convenient, mobile-based services. Facing rising competition and a squeeze on profits, leading money transfer companies are unveiling a range of new mobile money services targeting financially excluded communities.  

Money Transfer Giants

For decades, Western Union has remained the leading player in the global money transfer market, with its trademark yellow-and-black logo found in nearly every region of the world. Controlling an estimated 18 percent of the total money transfer market,[1]with a recorded USD $5.7 billion in revenue generated during 2012, the giant represents a formidable competitor to bright-eyed new entrants.[2] Western Union’s nearest competitor in the money transfer space, MoneyGram International, controls only about 5 percent of the market – though the company’s total revenue increased about 11 percent over the past year.[3]

Limited competition in the money transfer sector has historically resulted in steep transaction fees, presenting an obstacle for low-income migrant workers as they send money to families and friends at home. While remittance fees have been gradually decreasing, the average commission was 8.96 percent in the last year, according to the World Bank.[4]

Industry Incumbents Face Competition

Though their steep prices have been unrivaled for years, leading money transfer companies have recently faced increasing pressure from a host of new players, which bill themselves as more affordable, convenient alternatives to industry incumbents. These companies have strived to drive down consumer fees, offer new delivery channels and expand to untapped markets, often by leveraging online or mobile technology. 

San Francisco-based Xoom, for instance, has made a splash over the past year, reporting 68 percent revenue growth in the first nine months of 2012. The company, which offers online cash transfers to 30 countries, has a largely mobile presence – with nearly a quarter of its transactions conducted via mobile devices.[5] Mobile remittance service Boom (formerly m-Via) similarly aims to challenge existing Western Union services, by offering cheaper money transfers that are “tailor-made for mobile.”[6] 

London-based Azimo offers another innovative solution – enabling individuals to make direct transfers between international bank accounts and Facebook, tapping into the three-quarters of regular remittances users who are on the social networking site.[7] Cutting out the middleman and moving the money transfer business online, the company is able to offer fees that are 80 to 90 percent cheaper than traditional operators. According to founder Michael Kent in a recent interview: “As an online business our cost to serve is much cheaper, and we pass all those savings on to customers.”

Though Western Union reported a three percent revenue increase during 2012,[8] it has felt a squeeze in revenue from the rise of these “nimbler and more digital competitiors,” particularly in emerging markets.[9] This factor (among others) led Moody’s to downgrade the company’s ratings last November, with the Moody’s report suggesting that Western Union will be required to engage in price cuts amid an otherwise growing industry. According to the report, this trend “may reflect competitive pressures from other global and regional money transfer companies, as well as from alternative payment methods.”[10]

Recent regulatory changes may further increase competition in the global money transfer space. The Dodd-Frank Remittance Transfer Act in the US, for instance, requires money transfer organizations to disclose more information to customers regarding transfer fees and exchange rates.[11] While the legislation itself does not specifically govern remittance prices, it may enhance industry transparency, thus enabling low-income consumers to shop around for the cheapest service.

Maintaining Growth Through “Financial Inclusion”

Remittance giants have a lucrative incentive to maintain their edge in the growing money transfer market – which reached USD $534 billion globally in 2012, and is expected to rise eight percent over the next year, according to the World Bank.[12] With the 2.5 billion global unbanked adults comprising a significant portion of remittance senders and recipients, leading money transfer companies have unveiled a range of services targeting the financially excluded.[13]

Western Union, for instance, reported last week that its 2013 strategy will focus on strengthening consumer money transfer, and to “continue connecting the cash and digital worlds for its customers.” Western Union’s electronic channels, such as the Western Union website, account-based money transfer and mobile money, experienced revenue growth of 22 percent in the fourth quarter of 2012.[14] This may signal a growing interest in reaching unbanked consumers, many of which lack bank accounts, but have access to mobile devices. 

While Western Union first began offering mobile money transfer services in 2009, and the ability to send or receive funds via mobile is available in 14 countries, a range of new services have been introduced over the past year. These include a cross-border mobile money service in El Salvador,[15] a mobile money transfer service for MTN customers in Uganda,[16] and a mobile remittance platform for Military Bank customers in Vietnam.[17]Western Union has also become a partner in Financial Inclusion 2020, an initiative which aims to accelerate universal financial access globally.[18] 

MoneyGram, the second largest player in the remittance market, launched a mobile money transfer service last week in the United States. According to a recent PYMNTS.com article, integrating mobile money is a key part of the MoneyGram strategy to tap into the huge cross-border remittance market. Through the new service, customers will be able to send money, find MoneyGram locations, estimate money transfer fees and view recent account activity, all from their mobile phones.[19]

And The Winner Is…Consumers

As new entrants shake up the game, and incumbents adjust to the evolving marketplace, the ultimate winner will be the consumer – as prices drop and alternative money transfer channels emerge. Growing regulation around the remittance space will further decentralize the market and enhance the options available for would-be remitters, both banked and unbanked. All stakeholders will thus need to continue refining their services to tap into growing remittance streams, and to reach “mobile-preferred” customers. 

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For some background on the Dodd-Frank Act, you might want to read this past Mondato article. Also, check out our global remittance portal (currently in demo form on our website), which can be leveraged to enhance transparency across the global money transfer industry.

Underbanked is usually associated with underdeveloped. But limited access to traditional banking services has also proven a challenge in developed economies such as the United States, and mobile financial services providers are increasingly introducing services targeting this large, growing and often forgotten market segment. 

According to a 2012 report from the Federal Deposit Insurance Corporation (FDIC), both underbanked and unbanked households are on the rise in the United States (see sidebar for the difference between unbanked and underbanked), collectively comprising 28.3 percent of households, the majority of which are low-income.[1, page 4] In contrast to other developed countries, the U.S. stands out starkly for the proportion of its poorest residents who lack access to formal financial institutions. In the United Kingdom and Australia, for instance, only three percent of low-income households lack a bank account, and only about 9 percent of low-income Canadians are unbanked.[2]

The Cost of Being Unbanked

Lacking basic financial services can be expensive. Without a bank account, consumers must resort to expensive alternative financial services, such as payday loans, check cashers, rent-to-own services, money orders or pawn shops.[3, page 4] Using these services, low-income families often pay exorbitant fees simply to access their own funds, according to Sybongile Cook, Program Manager of Bank on DC, a collaborative initiative that aims to provide access to financial services to unbanked and underbanked households in DC.

But despite the cost of being unbanked, there are often huge barriers to entering the formal financial sector, particularly for individuals with no financial record. According to the FDIC report, the majority of all unbanked households do not have an account because they believe they lack enough money to warrant setting up an account (32.7 percent), or they do not need or want an account (21 percent). Other reasons cited include the inability to open accounts due to ID, credit or minimum balance requirements, as well as distrust of formal financial institutions.[4, page 27]

According to Cook, there is often a lack of brick-and-mortar bank branches in underserved communities, so people tend to gravitate towards more convenient alternative financial services. These communities many times also lack financial literacy and distrust banks, said Cook, so they opt to deal with the “known evil” of alternative services, rather than venture into the unknown banking system. 

MFS For The American Underbanked

Existing outside of the formal financial sector, but often owning mobile devices, the American underbanked represent a prime market for mobile financial services to flourish. According to a 2012 Federal Reserve report, many underbanked consumers in the US are already more avid users of mobile financial services than their banked counterparts. In fact, 29 percent of the underbanked have used mobile financial services over the past year, versus 21 percent of all consumers (only 10 percent of unbanked consumers, on the other hand, use mobile financial services).[5] 

Underbanked populations in the US also have wide access to mobile phones (91 percent), and many have smartphones as well (57 percent), signaling a broad opportunity to offer financial services via mobile channels among this population. Mobile phone ownership rates are also high among the unbanked, with 64 percent having access to a mobile device, and 18 percent having access to a smartphone.[6]

An array of mobile financial services have already emerged to tap into this market. FlipMoney, a digital wallet app linked to a prepaid debit card, was unveiled at last year’s FinovateFall conference in NYC. The app enables users to deposit checks through their smartphones, get access to funds immediately and pay bills. However, like other prepaid cards, there are relatively high fees for activation, monthly usage, withdrawing from ATMs and bank-to-card transfer. Further, users must access the card via a smartphone app, limiting its potential reach, particularly among the unbanked.[7]

Emida Cash and Transact (CAT) mobile wallet – targets both “cash-preferred” and banked customers through a mobile-based account that can be used to pay bills, buy groceries and transfer money, among other uses. Requiring no credit checks to acquire, the wallet provides a safe alternative to carrying cash, and one that is just as convenient. [8] 

Financial service giants, including American Express and PayPal, have also thrown their hats into the financial inclusion ring, offering digital services targeting underbanked and unbanked customers in the US. Through the Bluebird prepaid card, launched in late 2012 by American Express and Walmart, users can make deposits, pay bills and manage expenses from an app on their mobile phone.[9] The recently launched PayPal My Cash Card enables users to add funds to their online PayPal accounts using cash. They can then purchase goods or services via their PayPal account, whether online or through their mobile device.[10]

Despite established financial structures in the United States, lack of access to essential financial services is a large, growing, and often overlooked challenge. However, given the reach of mobile technology among underserved communities, mobile money has the potential to gain traction – providing a convenient and affordable alternative to predatory alternative financial services.