TransferWise, a London-based peer-to-peer money transfer service, just started accepting clients from India. This is big news for the U.S. money transfer industry, which has, with the exception of TransferWise, remained stubbornly uninterested in the Indian market.
Historically, established money transfer companies like TransferWise have avoided the outbound remittance market to prioritize the inbound market, where consumers send money to their home countries.
However, TransferWise’s recent announcement could signal a sea change in the money transfer market. As the first mover in India, TransferWise is poised to tap into the country’s $14-15 billion outbound remittance market. The long-term prospects are even better. India’s outbound remittance market is on track to grow to $28 billion by 2023 and is expected to overtake the U.S. remittance market, which is currently at $68 billion, by 2027.
So, why are so many U.S money transfer service providers still refusing to capitalize on the opportunity offered by developing and mixed economies? We’ve sketched our five possible explanations.
1. It’s a Matter of Legacy
Some of the biggest U.S. money transfer companies, including Western Union and MoneyGram, have been around for decades. In that time, they’ve built up a network of physical branches and agents consolidated around key target markets. On the
public relations front, they have a strong brand and impressive customer loyalty. As such, it’s not surprising that they’re reluctant to do business with a new outbound market, especially if said market is located in a developing economy and/or dynamic regulatory landscape.
What’s more, a lot of U.S. money transfer companies are still run by their founders. They have a strong sense of ownership of their legacy, and, in some cases, they may be more risk-averse than their newer counterparts in the global financial services industry. Even in more recently established firms, legacy management can still have a strong-arming effect on business strategy, stifling innovation and slowing the company’s ability to adapt to market changes.
2. It’s an Aversion to Fragmented Markets
Money transfer is a highly fragmented and competitive space. There are an estimated 450 money transfer players globally, with a handful of the biggest players controlling over 70% of the market.
Fulfilling the needs of a fragmented market is a challenge. It requires a higher level of agility and flexibility than legacy players are comfortable with. This is especially true for the outbound market, where consumers are sensitive to high fees and responsive to more competitive money transfer services.
In a mixed economy like India, institutional fragmentation is even more pronounced. Given that the market is dominated by a handful of regional firms competing against hundreds of provincial money transfer services. New entrants will invariably find it difficult to manage a consistent brand and customer experience.
3. It’s a Technology Barrier
International money transfer services are also struggling to keep up with the rapid pace of development in fintech, cloud banking, and other digital technologies. Many are still using antiquated technology, like paper-based operations and outdated back-office systems.
Breaching this barrier requires strong customer-facing technology, a streamlined process, and a network of agents and middlemen who are well-equipped to handle digital payments. In a country like India, the technological challenges are even greater. The market lacks a single point of payment. Rather, it’s a patchwork of regional, national, and provincial money transfer services, with no single dominant platform.
4. It’s a Matter of Regulation
The money transfer service is a high maintainance industry. It requires a lot of documentation and high levels of KYC compliance. Different countries can have vastly different regulatory requirements. As a result, outbound money transfer companies can expect an arduous onboarding process as they adapt to the unique regulatory landscape of each country.
For example, TransferWise is currently operating with a high level of efficiency in the U.K. and Switzerland. Where it can use the existing banking system to execute and record transfers. In India, however, they’ve had to partner with local banks and financial institutions to establish a stable and secure network for their outbound remittance services.
5. It’s About the Money
Money transfer is a high-margin business. It’s not a loss-leader but legacy players are more focused on profitability than growth. It’s much easier to lose money than to make it. That’s the reason why money transfer has been a low-growth industry for decades. It’s also why it’s so hard for new entrants to break through the legacy players’ barriers.
It’s a chicken-and-egg scenario. New entrants need to win the market to grow. But it’s a labor-intensive process and it takes a lot of capital to invest in marketing and advertising. And the outbound market is notoriously difficult to penetrate. In short, it’s a high-risk, high-reward business that requires a lot of commitment to break even.
The Bottom Line
TransferWise’s announcement is a positive sign that the traditional money transfer industry is finally starting to pay attention to opportunities abroad. With India’s outbound remittance market growing at such a rapid pace, the U.S. money transfer industry will have to adapt if it wants to remain competitive.