Scale is one of the most important things remittance companies must focus on, which is why long-standing incumbents continue to have the upper hand.

But investors are keen to disrupt this status quo, and have pumped money into upstarts such as WorldRemit, Azimo, Xoom and TransferWise. These companies are taking aim at Western Union and MoneyGram, hoping to capture a share of the nearly $600 billion remittance industry. And while some are focusing on specific corridors or payment methods, all of them will need to add scale.  

"Scale is very important in this business because the fixed costs are very high," said Samish Kumar, CEO of money transfer service, Transfast. If a remittance provider doesn't have scale, "it's very difficult then to make money."

Transfast, which was founded in 1988, allows consumers in 31 countries to receive funds. While India is its major focus, Transfast is aggressively trying to scale, with plans to have 100 receiving countries by the end of the year.

"Venture capitalists and investors think Western Union and MoneyGram have a duopoly, that needs to be disrupted," Roshan Polepalli, director of business development at Transfast. "But it doesn't happen easily or that soon."

It's taken MoneyGram 25 years to get to 200 countries. "And that's not because we haven't been trying," said Alex Holmes, executive vice president, chief financial officer and chief operating officer at MoneyGram International.

The fixed costs that add the most overhead for remittance players include licensing, compliance and risk mitigation.

Digitally-focused entrepreneurs see an opportunity to undercut the fees charged by Western Union and MoneyGram, by reducing their reliance on physical cash-out locations and agents. But that's easier said than done.

For one, countries like Australia and New Zealand require remittance companies to have a staffed physical office in sender countries with specifically labeled employees, such as general manager or compliance officer. Some countries further require the country-specific division to have a board. Other countries have capital requirements.

"It's hard to put a number on it. Setting up an entity and maintaining it, it wouldn't be hard to say [that costs] half a million to a million annually," said Holmes. "And that's before you put in sales staff and marketing."

And changing regulations also add cost. In Turkey, MoneyGram is adapting to new rules that require it to process transactions locally; formally MoneyGram handled transactions in Turkey through its U.S. data center.

The tough environment for remittance companies is highlighted by Regalli's recent pivot to business-to-business transactions. Regalli launched three years ago as a cross-border transfer provider, focused on sending funds to Mexico from the U.S. In a blog post outlining what led to the change, Regalli co-founder Inigo Rumayor said, "As it turns out, most of what I thought I knew  turned out to be wrong."

The five points outlined in the remarkably transparent post: "Online Fraud Can Kill You, Compliance is a Bitch, Customer Acquisition Is Expensive, Customer Trust Takes Time and Remitters Are Offline."

And these are the same points legacy remittance providers continue to drive home. Although some of these are changing quickly. While more than 90% of remittances are initiated offline, digital adoption for cross-border transactions is growing. And some remittance businesses are seeing success focusing on online and mobile, especially when they concentrate on millennials and consumers in the developing world.

Transfast's online business is growing at triple-digit rates, whereas offline is growing at double-digit rates, said Kumar. Transfast hasn't seen a big migration of its existing in-person remitters to digital channels, but instead sees uptake from new users that tend to fall under the millennial umbrella.

WorldRemit, which received $100 million in investment in March, is a remittance newcomer (founded in 2010) that's seeing success in the mobile money sector. The company's revenue tripled in the last year as it expanded its operations, allowing consumers from 50 countries to send to 120 countries.

Globally, mobile money services are available in 89 countries, particularly in the developing world, said Alix Murphy, senior mobile analyst at WorldRemit. There are more than 103 million mobile money users worldwide. The most well-known mobile money initiative is Vodafone and Safaricom's M-Pesa, which started in Kenya but has expanded to other parts of East Africa and parts of Europe.

In terms of specialization, "there's been a proliferation of new international money transfer companies focusing on a single corridor," Murphy said. "We are global but we are entirely online."

While WorldRemit promotes financial inclusion in developing countries which tends to focus on the under- and unbanked, users of its platform still have to have a bank account to participate. But Murphy predicts that consumers will open bank accounts if there are services they want to use, such as cheap and easy money transfers. People "are fed up with high transaction costs," she said.

Many of the startup remittance players focus on undercutting the incumbents' fees, but this differentiator is just a race to the bottom.

While Western Union and MoneyGram charge somewhere around 10% for remittances between corridors that are not as heavily trafficked, "the top ten corridors tend to be very competitive; the pricing has already come down quite substantially," said Holmes.

According to the World Bank, the global average cost of sending remittances keeps falling, with average fees at about 7.9% in the third quarter of 2014, down from 8.9% a year earlier. That trend is due in part to the pricing pressure from startups that focus on digital and mobile channels, as well as digital currency providers, such as those operating in Bitcoin.

Many startups offer free transfers up to a certain amount or other incentives like gift cards, but this cuts into the company's profitability. In 2007, JPMorgan Chase launched Rapid Cash, which allowed checking account customers to send three transfers totaling $1,500 per month to Mexico for free. In late 2013, Chase scrapped the program because of the intense regulatory scrutiny of remittance providers.

Holmes said a large bank, although he wouldn't disclose the name, came to MoneyGram to sell off a program similar to the one described. However, customers wanting to take advantage of the free remittances to Mexico would sign up for an account, make the transfers and then leave the bank account open but empty for the rest of the month, which isn't particularly beneficial for the bank.

Even though incumbents and startups aggressively compete against one another, especially as it relates to pricing, legacy remitters aren't oblivious about the momentum of mobile and digital currency. "We're not naive," Holmes said.

On Bitcoin and other cryptocurrencies: "If it's a regulated currency and something we can give an exchange value to, we'd be happy to play with it," Holmes said. MoneyGram, he said, has been in several discussions with cryptocurrency exchanges because several of its sales staff were intrigued by it, but nothing came to pass.

MoneyGram continues to build out its online and mobile channels. In the first quarter of 2015, money transfer revenue from self-service options grew 45%, now accounting for 11% of all Moneygram's transfers.

And MoneyGram "can scale up in those self-service channels in the countries [it operates] in because we're already in relationships with banks and other financial institutions in those countries," said Holmes. "We're not going to get disintermediated."

Western Union reiterated this perspective, touching more on its range of payment methods.

"We are a business centered on the needs of our customers, and we've invested and innovated to provide consumers and businesses with even more choices—in services," said Odilon Almeida, President of the Americas and European Union at Western Union. "Western Union services span a range of offerings and channels including retail, online, ATMs, kiosks and mobile consumer-to-consumer money transfers, consumer bill payments and cross-border business payments for small- and medium-sized enterprises."

The company is also looking at working with Ripple Labs, a digital currency platform. Almeida said Western Union has had preliminary discussions "regarding a pilot settlement project, but it is too early to discuss details at this time." 

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