Global Money Transfers

It has been close to three years since banks and non-banks jumped into the money transfer business with innovative products aimed at taking at least a sliver of market share from the likes of Western Union, MoneyGram and several regional players. It is easy to see why new players and old players alike continue to enter the market with innovative products. Overall, the international money transfer market grew 9.3 percent from 2003 to 2004, jumping from US$213 billion in 2003 to US$233 billion in 2004. The market will grow at a 10.1 percent cumulative average growth rate through 2008.

There is a growing divergence of opinion in the US marketplace over how best to reach the highly fragmented groups of foreign-born households that send money. One group of institutions, the "high-tech" camp, emphasizes technology and price as a primary consumer decision factor in determining the best money transfer operator to use. Technology and product platforms are leveraged to scale volumes of remitters across various ethnic communities and countries. This camp's bet is that a large and growing segment of the US foreign-born population is willing to change its behavior and move to online and/or card-based payment mediums if the price is right. The "high-touch" camp emphasizes ongoing personalized contact; these institutions rely primarily on walk-in traffic to their agent locations. Local brand and perceptions of reliability and service are emphasized over price. The largest players in both camps have powerful distribution networks, reputations, and brands, which are fundamental to maintaining dominant positions in the industry. The smaller players have developed more effective marketing campaigns with certain groups, targeting specific ethnic segments of the remitter population with laser-like focus.

Within the next 12 months, we will see business models that combine the best of both camps as customers begin to embrace other channels and products offering a high level of trust and convenience. Local merchant locations will rapidly be transformed into money transfer agent locations that view money transfer products as an extension of their existing product lines. Local banks will be able to offer best-of-breed money transfer services without incurring heavy expenses, and larger banks will have an opportunity to use their online channels to attract a growing segment of the remitter market.

Here are a few more trends we can expect to see:

"Free" money transfers will become commonplace. We will see more bundling of tailored money services by banks and non-traditional entrants that will include "free" money transfers. More banks will use money transfer services as loss-leaders to generate account openings and cross-sell opportunities. Non-traditional entrants will reduce the price to win additional market share and additional walk-in traffic. The price evolution of money transfer products for banks will be similar to that of consumer bill pay-the product is worth giving away as an account acquisition tool to win overall market share and establish banking relationships. The "high-touch" camp will be unlikely to follow with lower prices for the lower end of the money transfer market.

Exclusive distribution arrangements will erode. One of the traditional key competitive advantages a large money transmitter has enjoyed over its rivals is the exclusive arrangements with its check cashing, merchant, and foreign bank agents, both on the originating and the receiving side of its agent network. However, half of traditional originating and receiving agents currently signed up for exclusive relationships will no longer accept exclusivity within five years.

Sizeable numbers of foreign-born individuals are educated, banked, and online. Contrary to popular belief, many immigrant groups using money transfer services tend to have at least a high school education and at least one bank account or credit card. More than 80 percent of the US foreign-born population from most of Latin America, Asia, and Europe has a high school education or higher. Levels of education for Mexican immigrants have jumped more than 30 percent in the past 10 years. A growing number of Asian immigrant households remit online, as do a high number of Eastern European and Caribbean households. These groups present significant market opportunities for money transfer companies that have the market savvy, technology, and operational know-how.

The one-stop non-financial services shop. Successful remittance products will be tailored to the needs of immigrants. Prepaid phone services, payroll cards, prepaid credit cards, and loyalty cards are just some of the products merchants are offering to their customers in addition to money transfer. Many banks often fall short in their tailored offerings, and this will continue to be a major impediment to bank-oriented consumer adoption. Within the next 12 months, several traditional money transmitter companies will market bundled card-based services along with money transfer to deepen the overall consumer value proposition.

Online offerings: somebody will get it right. By 2007, we will see 42 percent of all foreign-born households doing some level of online banking, up from 32 percent this year. First-mover banks will have a window of opportunity to include online transfer functionality within the next 12 to 18 months to win this group, which currently frequents traditional money transmitters such as Western Union. There is a terrific opportunity for banks and non-banks to offer more robust global inter-institutional funds transfer services online. More than half of Western Union's customers today are already banked, and most do not have an alternative product marketed by their bank that is painless, quick, and cost-effective. That will change as banks offer transfer services through their online channel.

First-generation ATM money transfer cards: right timing, wrong seller. ATM money transfer card products have had terrible bank adoption rates since being introduced in the last three to four years. Remittees who are highly educated and have been already been exposed to ATM technology in receiving countries tend to have an interest in this product. However, these groups are not the focus of bank offerings. We will see higher adoption from new entrants that have very focused, tailored offerings such as loyalty cards and bundled phone and bill pay services.

Dan Schatt is a senior analyst at Celent Communications, a global research and advisory firm focused on the application of information technology in the financial services industry. He can be reached at [email protected].