Remittance incumbents and digital startups are aggressively dismissing each other in public statements, though both sides have distinct advantages in the battle to control the expanding remittance payments market.

During a keynote presentation on Nov. 4 at the Money2020 conference in Las Vegas, Hikmet Ersek, CEO of Western Union scoffed at a question about Bitcoin before saying that the decentralized digital currency wasn't a storm that kept him up at night. The incumbents contend startups will have trouble disrupting their scale.

But virtual currency backers feel differently—saying Bitcoin and mobile remittance apps can and will cannibalize the establishment.

“It is not going to happen in 2015 but it is coming and Bitcoin’s first target is Ersek's company; it's the lowest hanging fruit,” said Theodore Monroe, a payments attorney at Theodore Monroe law firm. Monroe likens Ersek's thoughts on Bitcoin to Microsoft leader, Steve Ballmer's adamant claim in 2007, “There's no chance that the iPhone is going to get any significant market share. No chance.”

Benjamin Lawsky, superintendent of the New York State Department of Financial Services, also has high hopes for Bitcoin. The digital currency could benefit “the huge community of people that every week go to Western Union or MoneyGram and send money home to their family...and pay eight to nine percent on that,” he said during a keynote on his proposed BitLicense regulatory framework on Nov. 2 at the conference.

Other startups that use online and mobile platforms to facilitate remittance while bringing down their overhead could also rattle the industry, especially as adoption of mobile devices increases and the prevalence of mobile wallet-accepting merchants grows.

In March, WorldRemit, a London-based company that allows users to make bank deposits via online and mobile only secured $40 million in investment, and has used that money to expand into new markets. Recently the company added 15 countries in Latin America which account for nearly 10% of the world's remittances.

Other digitally-focused remittance startups include Remitly, ZipZap and Ripple. Xoom, a 13-year-old company is also a significant player in the remittance space scraping brick and mortar for mobile.

These companies are also getting a regulatory boost. The NYDFS will likely put in place an on-ramp for not only Bitcoin but also other money transmitting startups to allow them to operate without a state license for a period of time in an effort to help these companies start up without being burdened by heavy compliance costs.

Still Western Union and MoneyGram remain unphased.

“Incumbency is a powerful thing,” said Pete Ohser, executive vice president of U.S. and Canada at MoneyGram International during an interview at the show. “No doubt there's a lot of competition but we think competition is a good thing. We don't get very concerned about it. For the last 30 years we've built out or core asset...which was very expensive.”

Working in the incumbents' favor is the predominance of cash in many countries that rely on remittances. For example, Mexico, which is MoneyGram's largest corridor, is still a largely cash-based economy. With 347,000 cash payout locations in 200 countries, MoneyGram's physical footprint is its greatest strength.

And the same is true for Western Union, which operates 500,000 agent locations in 200 countries with the ability to dispense cash in 120 different currencies.

“Outside Kenya, the rest of the world hasn't moved to digital like most people think,” said Ohser. Startups in the remittance space “aren't building products for the customer, they're building products because they think the technology is cool.”

But Ohser may be underestimating the rapid growth of smartphones which could give the digitally-focused startups traction sooner than later.

Smartphones account for one in three mobile connections today. By 2020 that number is predicted to increase three-fold to account for two-thirds of all mobile connections, reaching six billion, according to the GSMA, a group that represents the interests of mobile operators.

When asked whether MoneyGram would use Bitcoin on the back end to facilitate faster, cheaper transactions, Ohser said, the company's cost is not on the back end.

Most of MoneyGram and Western Union's overhead remains at the physical locations where it has to pay agents that facilitate transfers or pay merchants when a self-service kiosk is placed in store.

But while lauding this physical footprint as the key reason startups won't disrupt its place in the market, both MoneyGram and Western Union are building out significant Web and mobile presences.

MoneyGram has launched thousands of self-service kiosks in retail locations. In the third quarter of 2014, self-service accounted for 10% of the company's money transfer transactions. The company's goal is to have self-service account for 15% to 20% by 2017, Ohser said.

MoneyGram pays a smaller commission when kiosks are installed versus having cashiers process all transactions, he said.

“People underestimate how tech-savvy we are,” Ohser said. “As soon as Lawsky [or another regulator] says it's OK to work with Bitcoin, it's a partnership opportunity.”

Western Union has continued to develop its online and mobile transfer services, pushing its customers into that channel with reduced fees and quicker payouts. In August, the remitter expanded its online money transfer capabilities into five countries in Europe, including the U.K., Belgium, the Netherlands, Austria and Germany.

Western Union more recently announced its work with Danal, a carrier-integrated mobile commerce solutions provider, to use Danal's Mobile Identity service. Danal will help Western Union validate customer information through its partnerships with tier one mobile network operators.

The digital channels have allowed the incumbents to lower their fees. MoneyGram's average cost globally is 4%, Ohser said, much lower than what industry participants site which is closer to the World Bank's 7% average remittance cost. The big legacy remittance businesses “are easy targets for a lot of folks...but there's a lot of misinformation,” he said.

But smaller markets and jurisdictions with tight capital controls are usually more expensive to work in, so the price of the remittance increases.

Western Union also blames fraud for high prices. “There's a lot of consumer fraud,” said Abhinav Gupta, director of fraud product and strategy at Western Union. Fraud accounts for 1% to 2% of all standards e-commerce transactions and 2% to 5% of all high net value transactions. Western Union's fraud rates are multiple times that, Gupta said.

“A lot of these new entrants don't know the extent of fraud they'll get hit with,” said Gupta.

The increased adoption of digital channels could help bring fraud down though. Because of location and biometrics data and device ID, digital startups should be able to lower fraud rates. Plus Bitcoin businesses are adopting extra security measures such as cold storage (offline) vaults and multi-sig transactions, in which multiple parties must authorize a transaction before its approved.

“There's lots of room for costs to come down; costs will come down 90 plus percent,” said Hank Uberoi, CEO of Earthport, during a panel discussion on Nov. 5 at Money2020.

The remittance industry will likely more towards a freemium model like many of the companies within the services economy, Uberoi said. Freemium models give a base layer of service for free and monetize value add services or products. BitPay recently moved to this type of model.

Transfast flips the freemium model, transferring any remittance over $1,000 for free, but charging on transactions under that. Transfast has partnerships with 104 banks in India, allowing money to be remitted directly into recipient bank accounts for use immediately, the company said.

Michael Laven, CEO of Currency Cloud, a money transfer provider, said when there's instantaneous conversion from dollars to bitcoin and vice versa “we're talking milliseconds in terms of market risk” so prices could sink to near-zero.

“But there are real costs involved...so there's going to be cost somewhere,” said Scott Galit, CEO of Payoneer, citing compliance costs.

MoneyGram and Western Union can also use their size to invest in compliance. MoneyGram recently announced it'll be spending $80 million to $90 million on compliance over the next few years. And during its third quarter 2014 earnings call, Western Union announced compliance-related expenses are expected to total 3.5% of revenue.

“By the time [Bitcoin and other money transmitter startups] deal with compliance...the friction will be back in,” Ohser said.

Right now Bitcoin businesses usually charge 1% per transaction or 1% only when customers move from U.S. dollars or another national currency into Bitcoin or vice versa. But once the regulatory environment is clarified and businesses have to start spending hundreds of thousands of dollars on money transmitter licensing applications, compliance officer salaries, anti-money laundering (AML) programs and capital and bond requirements, those costs might then be off-loaded to the customers.

Almost one-third of Coinbase's full-time staff, which has expanded quickly since it was founded in June 2012 to about 50 full-time employees and 50 remote contractors, are compliance-focused, said Adam White, director of business development and strategy at Coinbase.

Digital startups, including those that operate in Bitcoin could also have trouble with the regulatory schemes in developing countries. For instance, Africa, because of its high mobile payment penetration, has been seen as a rich market for Bitcoin disruption, but there are huge regulatory hurdles throughout much of the continent and regulators are careful of new entrants.

MoneyGram has already made headway in Africa. The remitter and Safaricom, which pioneered M-PESA mobile money transfers, have partnered to allow consumers in more than 90 countries outside Kenya to send money directly to the 20 million M-PESA customers living in the country. 

Disruption may also be coming from an even bigger legacy player, the Federal Reserve. In October, the Fed revealed its plans for improving the U.S. payment system, suggesting that building a whole new infrastructure could be the best way to facilitate real-time payments. The Fed is also considering expanding the reach of its international ACH service, since banks have begun to sever ties with money transmitters because of regulatory concerns. This could also cut into Western Union and MoneyGram's business.

But even with all of the tailwind for low cost real-time payments, Ohser said, just like some people buy expensive cars when a cheaper model would do the same basic thing, some people will choose to use MoneyGram even if it's more expensive because of the trust the company has built up and the additional services it provides.

 

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