Business and Finance
How Money Transfer Companies Squeezed Four Years Of Digital Growth Into Just Two Months
Imagine that for the last twenty years you sent $200 cash home every two weeks using a local store with people you know by name. Suddenly, you weren’t allowed out of your home but your family was still relying on you to send money to them, what would you do? This situation has been faced by millions of people, especially the migrant worker community worldwide. It has also been the single biggest catalyst for growth of digital remittances ever.
Four years of digital growth has been compressed into two months in the money transfer space. Leading incumbents such as Western Union WU and MoneyGram and the Fintechs such as WorldRemit, Remitly and TransferWise have all reported tremendous growth in their digital businesses driven by the stay at home orders and the Covid-19 crisis. How are they responding as businesses?
And, the big question for the industry is whether this unexpected but welcome digital boost will remain after the crisis. Will consumers’ behavior have changed for good or will they revert back to cash once they feel safe to head out again? The answer is a complex mix of many factors – societal, economic and technological.
We spoke with players across the sector including Western Union to understand these dynamics and talked in depth to two of the most prominent, but very different companies: MoneyGram and WorldRemit. MoneyGram, founded in 1940, is perhaps the second best known player in the market globally behind Western Union. Whilst the cash-to-cash remittance business still accounted for 80% of MoneyGram’s MGI transactions in 2019, the company has invested heavily in its digital business in recent years. WorldRemit, founded in 2010, is one of the new digital focused Fintechs and does not even offer cash pay-in. WorldRemit has raised around $400m to date and established itself as one of the leaders chasing down the cash-based incumbents.
Digital money transfers comes of age
Ten years ago, digital cross-border payments was a nascent industry. Some of today’s leading Fintech brands such as TransferWise, WorldRemit and Remitly were just getting started. For the big cash-based incumbents such as MoneyGram and Western Union, digital was hardly discussed and was only a tiny percentage of revenue and transactions – around 2% in 2011 for MoneyGram and we estimate a similar proportion at Western Union. How things have changed.
Whilst WorldRemit’s path to becoming a leading digital player was in line with that of a typical Fintech, MoneyGram’s journey has been very different. It would be fair to say that MoneyGram was late to the game. Three years ago, it operated websites in only three countries. WorldRemit and others were operating digitally in ten times as many countries. Realizing the importance of digital, MoneyGram, led by Chairman and CEO Alex Holmes embarked on a major digital investment and they now operate digitally in 70 markets. The benefit of starting later has meant they have been able to build their platform on newer technologies than some of their peers. This has given them the ability to respond to the increased digital demand during the current Covid-19 crisis.
The headline numbers in a Covid-19 themed year
The biggest player in the consumer facing money transfer market, Western Union, reported a 13% increase in its own digital revenue in the first quarter of 2020. MoneyGram reported a host of positive digital numbers for the same period and revenue was up 17% overall for its digital business. These first quarter numbers typically underestimated the digital impact of Covid-19 on remittances as mid-March was when the lockdowns expanded globally and digital penetration really started to jump. Whilst few public companies are now issuing any forward guidance, both companies have been providing additional monthly numbers. Western Union reports that digital transactions accounted for 32% of their consumer business in April; MoneyGram reported its digital transactions jumped to a share of 28% in April too, up from 18% in the first quarter. Putting that into perspective, that’s effectively putting four years of expected digital growth into just two months.
On the Fintech side digital growth has also been fast. WorldRemit reported 150% year-on-year growth in new customer activations for March and April. Other digital-only players such as Remitly and Azimo have reported increases of 100% in month-on-month customer additions. Much of this has been without any substantial additional marketing spend – it has typically been via word of mouth and social channels.
The other side to all the digital growth though is that the overall remittances market, dominated by cash, is not expected to grow through 2020. The World Bank released a forecast last month that they expect global remittances to fall by 20% this year, a devastating number for many economies dependent on migrant income flows. Last month Dilip Ratha, Lead Economist for Migration and Remittance and Head of the World Bank’s Knomad division, told FXC Intelligence that the biggest difference between this economic crisis compared to the one in 2008 is that this crisis is global and therefore its economic impact is global.
The impact of the lockdown
Breon Corcoran, WorldRemit’s CEO, splits the effects of the lockdown into two separate factors. What he calls the societal effects, primarily health; and second, the economic effects. The lockdown, a societal effect, has been a great accelerator of change, driving customers online and away from cash.
Traditional cash transactions went to zero in some geographies and fell by around 30-40% overall in late March and April for the major players. Whilst the expectation is that some people will go back to paying cash over the counter, not everyone will. This means the once in a generation boost to digital will have lasting effects.
Don’t forget the impact on recipients of the transfers
Much attention is often devoted to the customers sending the money but the receive part and recipients of the money are just as important. Recipients are the ‘last mile’ that is often not easily overcome by digital solutions in many cases, especially as how a remittance recipient chooses to receive their money is very much cultural and distinct to a local market. MoneyGram, for example, has seen an improving bank account deposit market in Mexico, but well north of 95% of all money transfers going to Mexico are still picked up in cash. If you contrast that with India or Pakistan for MoneyGram, walk-in cash pick-up is still predominant but it’s closer to a 60% share.
In the big receive markets such as India, Bangladesh, and the Philippines, MoneyGram still sees customers choosing either cash pickup or traditional payments into their bank account. But for recipients in some African markets and parts of Asia such as China, mobile has risen in prominence in the crisis.
Offering a more mobile focused experience
Mobile app tracking company Apptopia reported year-on-year growth of 52% of mobile app downloads in April across the leading players in the space as customers sought the added convenience of mobile.
Relaxation of previous constraints has also helped drive mobile growth. For instance, in Kenya, which is heavily dominated by Safaricom’s mPesa mobile money product, Safaricom increased the maximum allowable send amount from 70,000 KES to 150,000 KES (roughly $700 to $1,500). This move alone, says WorldRemit, helped support a big increase in mobile received remittances that they’ve seen head into Kenya.
However, as convenient as mobile money transfer is, as MoneyGram’s COO Kamila Chytil cautions, you can’t force people to move to mobile. Offering a range of send and receive experiences and letting the customer know these are all available is the core of MoneyGram’s omni-channel strategy but they do not try to push any single one to the customer.
Low and promotional pricing in the crisis
Unsurprisingly, we’ve seen a large range of promotional activity across the industry in the last few months, especially skewed towards onboarding these new digital customers. WorldRemit claims to have only cut prices over the last three months, both to win new customers and to not be seen to have been raising prices in a difficult time. MoneyGram’s pricing strategy is, according to Mr. Holmes, to simply price very competitively to gain market share.
Pricing patterns vary widely across send and receive corridors. Just one example below shows the aggressive pricing from MoneyGram compared to some of their peers.
But price isn’t the only factor when customers make the choice of which provider to use.
The increasing importance of speed
In the current time of high anxiety, the speed of a money transfer has become increasingly important. Why? As Mr. Corcoran describes it, the worst possible case for a customer is that they think their money is stuck with the money transfer company when it’s actually in transit.
How have the main companies handled that? At the customer end, increased communication. At the business end, increasing the speed of the payout side. And as Mr. Holmes adds, in times of anxiety, it is even more likely a new digital customer will want to move to a brand that they trust. This is a clear plus for those who either have long-standing widely known brands such as Western Union and MoneyGram or those Fintechs who have been able to invest heavily in brand building such as TransferWise, WorldRemit and Remitly. Khalid Fellahi, President of Western Union Consumer Money Transfer, says that customers talk about the importance to use a trusted brand when switching to digital send options and he believes this is a key factor in driving their digital growth.
Scott Galit, CEO of Payoneer, a leading cross-border payments platform specializing in the ecommerce and freelancer markets describes it simply. Going to a known brand for someone who has never bought anything online or sent money digitally before is their “bridge to the digital world”.
The number one challenge for the sector in delivering this “digital bridge” has been in customer service. Not only have more customers than expected been signing up but many are new to digital and mobile offerings and need extra help. Western Union set up an online video service to help talk to new customers and MoneyGram has added extra online chat support in 30 languages.
The longer-term economic impact on the money transfer sector
Once the lockdowns ease and some of the government stimulus and support checks run out, the economic side of the crisis will become more clear. This is where Mr. Corcoran is more concerned. The first big marker for this change can already be seen in the steep reductions in the average amount sent in each transfer known as average transaction value (ATV) within the industry. The scary but open question for everyone across the sector is what will happen to average transaction values through the rest of this year and through 2021. The expected further economic downturn and unemployment will only keep these transaction values down. And if the World Bank’s forecast comes true, the overall gains made through the new digital customers will be just one part of an overall shrunken market. As Mr. Fellahi describes, while Covid-19 has led to declines in their retail business, this has been partially offset by increased use of our digital channels.
The toughest factor here is uncertainty. Even Western Union, long a stable forecaster of future revenues has pulled back any forward looking guidance for now.
Opportunities for the money transfer sector to develop
Even if the flows to the sector do temporarily decline, we see a number of areas where the sector can benefit in the longer term. We’ve seen a step change towards mobile money, according to Mr. Corcoran. He sees it as a better experience in terms of speed, and as the mobile money ecosystems and interoperability among services improve, growth will only continue.
As demographics shift, the new migrants coming in are always going to be younger than the outgoing ones as well. The new ones are typically mobile based and they all understand digital apps and services. As Mr. Holmes puts it, MoneyGram will be well placed to benefit from all these fast-tracked product developments that could have taken years to reach scale but have now happened in a number of months.
What will make all these new digital customers stick?
A number of things would have to happen for digital customers to stay digital with the brand they chose during the lockdown. The first area is pricing. Traditionally, pricing has been cheaper for digital rather than cash to cash according to our pricing data at FXC Intelligence. But in most developed markets, there are many more digital players than there are cash providers. Once a user has had the behavior of opening up an app or visiting the online page of a digital provider, they produce a digital footprint to enable competitors to compete for their business.
Second, are the new digital customers really new customers? This is a key question for the cash-driven incumbents of the sector. If they are, you can argue this is not cannibalizing the existing base. The downside of that argument is that it’s expensive to acquire customers and, in digital, extremely competitive. Furthermore, can some of the profit margins (and pricing) achieved in cash remittances be sustained in the highly competitive digital area?
Finally, remittances and bank to bank payments are broadly a commodity item. To be able to hold onto these new digital customers, those who bring in new product innovation may have an edge. How much of the digital growth spurred on by the Covid-19 crisis becomes the new baseline will depend as much on consumer behavior as it will on the new digital product offerings that the money transfer sector provides.