The history of international payments can arguably be summed up by the history of one company – the US-based Western Union.
Founded in 1851, the company dominated the telegraph industry for decades in the late 19th century. The expensive hardware required for sending a telegram meant it was very difficult for any of Western Union’s challengers to break into the firm’s huge profit margins. The company reached a near-monopoly in 1943 when it bought its main competitor, Postal Telegraph Inc.
As the communications firm was reaching near-supremacy, however, the winds of technology changed, and telegrams became ever-less important. Western Union was forced to adapt, and the company settled on cross-border payments as its relevance-maintaining niche.
But just as technology change in the 20th century – the decline of telegrams and the rise of phone and radio – broke Western Union’s communications monopoly, tech developments in the 21st century, which make cross-border payments easier, quicker and cheaper, are breaking Western Union’s monopoly once again.
Breaking the monopoly
A generation of startups – many of which were founded in the UK – is seeking to provide a more convenient digital service. They want to break up the near-monopoly held previously by large legacy outfits like Western Union and MoneyGram.
This week’s news that TransferWise, Britain’s leading digital remittance firm, has for the first time since its 2011 founding become profitable, surprised nobody. It now boasts 100 million customers and is valued at $1.1bn (£850m), making it one of the UK’s few ‘unicorns’ (a privately-owned company valued at $1bn or more).
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Another startup disrupting this space is the London-based WorldRemit, which specialises in mobile-to-mobile cross-border payments. The firm, founded in 2010, hit headlines last year when it landed $45m (£35m) in venture capital funding from TriplePoint Venture Growth BDC Corp, and Silicon Valley Bank.
What is it that rising startups like TransferWise and WorldRemit have, but legacy institutions like Western Union seem to lack?
The answer: simple economics, according to Alix Murphy, director of mobile partnerships at WorldRemit. Some 90% of peer-to-peer remittance is still conducted in cash through high street agents, she says, leaving traditional remittance firms with costly overheads. Digital startups can abandon these cumbersome legacies to create a more streamlined business model, with savings passed on to the user.
It’s not just about cost, either. Todd Latham, chief marketing officer at Currencycloud – a British FinTech startup that assists businesses in making cross-border payments – believes the rise of digital remittance is driven more by basic customer experience.
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“If you’re sending £200 a week to Poland, then you care whether that’s costing you £5 or £2, for sure,” Latham says, “but I don’t think it’s about cost. Customers are increasingly used to a great digital experience. Traditional companies who can’t adapt to that are really struggling.”
This emphasis on user experience, rather than cost, is a common theme across the FinTech sector. Tom Blomfield, the charismatic CEO of London-based challenger bank Monzo, regularly complains about the “crappy” service he encountered from high street banks, which he says are wedded to outdated practices and large, cumbersome physical branches. This inconvenience is then passed on to customers, according to Blomfield and other FinTech leaders.
TransferWise has a similar story, with co-founders Hinrikus and Kristo Kaarmann saying they were inspired to create the firm after becoming increasingly frustrated with the fees charged by mainstream banks for international money transfers.
This instant digital experience resonates particularly with millennials, says one venture capital firm that has invested in digital remittance. Millennials have grown up with this ‘smartphone culture’ and cannot countenance sending money overseas in cash.
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Yann Ranchere, partner at London-based venture capital firm Anthemis which took part in a £20m Series D investment in Currencyloud, said young customers have only ever used digital firms like TransferWise, and have “never actually known or been involved in the traditional ones”. Digital remittance will continue to grow “as people and companies become more and more used to doing things efficiently online,” he added. Indeed, with TransferWise just last month announcing a new office in Singapore, the idea of digital remittance firms on an inexorable climb seems to carry weight.
Digital remittance is also more secure, the startups claim, with cash transfers more vulnerable to human error or fraud. Indeed, the reputation of traditional, cash-based remittance was served few favours by the news, earlier this year, of Western Union agreeing to forfeit a record $586m to US authorities for failing to tackle fraud.
The most common form of remittance payment in the Western world comes from immigrant workers sending wages back home, to developing countries – and British remittance startups have jumped in to serve this market. WorldRemit is particularly interested in this form of transfer, Murphy says. The firm’s founder, Dr Ishmael Ahmed, experienced first-hand just how difficult it was to send money back home when he was serving as a compliance advisor for the UN’s East Africa Remittance Programme.
Remittance startups, Murphy says, are not just helping Western immigrants, but also their families back home, who can now receive their loved one’s wages through a direct digital transfer, saving them what often amounts to hours of walking to their nearest remittance agent. She mentions one WorldRemit user in Kenya, who was previously forced to walk 100km to collect the wages sent from her UK-based son in cash.
“Now she doesn’t have to leave her house”, Murphy says, “she can receive them any time of day or night.”
Improvements in remittance technology are, according to some, a by-product of globalisation, with the UK now seeing an outflow of more than $17bn (£13.2bn) travel into developing countries each year.
But a globalisation-driven increase in demand does not tell the full story. Startups simply do a better job than old legacy institutions, remittance firms claim, particularly in mobile-to-mobile transfer.
Of the 2 billion people in the world without a bank account, Murphy says, around half have access to a mobile phone, with some 500 million using mobile money accounts. Some 36% of all of the payments processed by WorldRemit now transfer directly to a mobile money account, bypassing banks entirely – a “transformative” development, Murphy says.
Amid market chatter dominated by discussion of costs, customer experience, and business models, it is easy to forget the human side of the remittance revolution. For the 250 million people across the world now working away from their country of origin, digital remittance services make the world feel a little smaller. Indeed, WorldRemit says the bulk of its developed-to-developing world transfers goes to fund school fees, medical bills and other basic necessities provided by loved ones.
As telegram use began to fade into history during the 1980s, Western Union quickly found a new niche, settling on cross-border payments. If digital remittance startups are to be believed, then Western Union – and other traditional remittance firms – might be advised to reinvent themselves once again.