FinTechs take on traditional modes of money transfer for immigrants worldwide
For a long time, the money transfer business was the purview of immigrants living in Western nations sending money back home to other countries. Many families depended on international banks or Western Union to reliably transfer money, even as they often paid exorbitant fees for the privilege. Yet as the need to transfer money across borders expanded beyond immigrants, technology found a way to meet the growing demand. Today, dozens of apps have made it easier than ever to send and receive money, disrupting the financial sector.
For decades, the options for money transfer across borders were few and far between. International banks like HSBC opened branches all over the world, making it an easy choice for business and people who were always on the move. Their huge market presence allowed them to charge higher fees on transactions, between 10 to 15% on a single wire transfer. The most well-known alternatives were Western Union or MoneyGram, with agent locations in 200 countries and territories. For those unable to open a bank account, these businesses were virtually the only alternative and they, too, cost dearly.
The 2008 financial crisis had a ripple effects that touched every monetary institution, and of course international money transfers were not immune. The number of transactions greatly decreased. By the time the market recovered however, technological innovation had also reached the financial sector. Financial startups, dubbed FinTechs, saw an opportunity to break apart the components of traditional banking and create apps that could address very specific consumer needs with less bloat. FinTechs were able to offer consumer-focused solutions for people looking to obtain micro-loans, save money, and quickly exchange money between the consumer and retailer, or across borders, all at a reduced exchange rates and little to no fees.
Transferwise and Revolut gave people the power to exchange money at the best rates
Dozens of new apps made it easy to send and receive money directly to one’s bank account at a reduced cost, and tech giants such as Google even embedded money transfer within Gmail. The new businesses created serious competition for banks and wire transfer companies who struggled to compete. Companies such as Transferwise and Revolut gave people the power to exchange money at the best rates without having to leave their home.
FinTech companies found ways to circumvent, or at least minimize the interaction with, traditional banking institutions. For example, TransferWise creatively addressed currency exchange, which was often where customers lost money. The start-up, founded in London in 2011, keeps large stores of different currencies scattered all over the world. They don’t exchange the currency, but rather draw the equivalent amounts from each currency to deposit into accounts, thus avoiding costly fees imposed by other intermediaries, and offering the best exchange rate possible. Customers don’t even need to have a TransferWise account to receive money–you can simply use your email address and then transfer the money to your preferred bank account on your own.
Another banking alternative, Revolut, allows people to use a prepaid debit card (connected to a digital wallet) to transfer and spend money in 120 currencies with no fees. The also deal in peer-to-peer payments, and can also handle some of the most popular cryptocurrency such as Bitcoin, Ethereum, and Litecoin. Its enormous success has helped them move into even the investment business.
The average cost of transfers is still high
In spite of the dramatic increase in the popularity of money transfer options, there are still a number of drawbacks. Although the technology has improved to reduce the cost of transfers, the average cost has not significantly gone down. The World Bank has reported that the average cost of transfers is still high at 7% on 200 Euro (234 USD) compared to the objective of 3%. Money laundering is also an issue, since in some cases the country’s financial reporting system is bypassed, making it difficult to regulate. This is also related more broadly to security, as millions of customers are sharing their data with unknown start-ups. Financial regulation must play a crucial role so that companies operate legally in the countries in which they operate
Traditional money transfer companies are working to compete in this transformed market. Whereas the Western Union or Moneygram experience was focused on a retail, brick-and-mortar storefronts, there is an acknowledgement that it is important to digitize the model and focus on app user experience. Moreover, consumers shift from using physical cash to making entirely digital exchanges from one account to another, transaction speed becomes more important.
As more companies enter the market, traditional banking institutions will need to adapt to current consumer needs for speed, convenience, economy, and customer service. Although regulatory scrutiny could make it more challenging for FinTech startups to succeed, it will be important for banks and private money transfer companies to modernize, and possibly cooperate with these new institutions. In the meantime, the money transfer business will continue to grow and specialize, and reap the financial rewards.