The World Bank estimates that, on average, money transfer companies consume a whopping 7.1 percent of a typical remittance<\/a> from a migrant worker to his or her relatives at home.<\/p>\n In a global remittance market generating flows of around $600bn a year, this juicy commission comes from hitting migrants with a mixture of fees and non-competitive foreign exchange (FX) rates.<\/p>\n Global remittances<\/em><\/p>\n Source: https:\/\/voxeu.org\/<\/em><\/p>\n Cheaper and faster<\/strong><\/p>\n The remittance business has traditionally been dominated by two US companies, Western Union and MoneyGram, who send payments through their proprietary networks. But it\u2019s now witnessing a real shake-up as new entrants use the internet and mobile technology to make payments cheaper and faster.<\/p>\n In 2017 one digital money transfer firm, TransferWise<\/a>, became a unicorn (a privately owned start-up valued at over a billion dollars), joining an elite of European fintech firms that includes German direct bank N26<\/a>, UK digital bank Monzo<\/a> and mobile payments company Revolut<\/a>.<\/p>\n Western Union currently makes a 5.5% margin on transfers<\/p><\/blockquote>\n The old guard in the money transfer business is far from dead, though. New York-listed Western Union, one of the oldest names in US corporate history, is still the largest player in the sector. The firm handles nearly $80bn a year in remittances and in November, it launched a new digital transfer business<\/a> to try to head off the fintech insurgents.<\/p>\n Western Union currently makes a 5.5% margin on transfers, nearly seven times more than TransferWise\u2019s 0.8%, according to SaveOnSend<\/a>, a specialist money transfer blog.<\/p>\n But by comparison with the rocketing private market valuations of many fintech companies, Western Union\u2019s share price is flagging, sitting around 35 percent below a peak reached more than a decade ago.<\/p>\n Investors don\u2019t fancy the long-term prospects for the money transfer incumbents, in other words.<\/p>\n The mechanics of global transfers<\/strong><\/p>\n Many remittance-focused start-ups, such as TransferWise, Azimo, WorldRemit and TransferGo, are based in London, benefiting from the UK capital\u2019s reputation as the leading global fintech hub.<\/p>\n I recently visited Azimo\u2019s CEO, Michael Kent, at his firm\u2019s offices in London\u2019s Islington.<\/p>\n Michael Kent<\/em><\/p>\n Handling an average transaction size of $450 for its clients, Azimo now employs 125 people and has raised $66m across five funding rounds.<\/p>\n For CEO Kent, the launch of Azimo in 2012 was a logical progression: he had spent the previous seven years assembling, consolidating and then selling a chain of high street money transfer businesses.<\/p>\n \u201cWhen we launched Azimo, we took everything we knew about payments, clearing, the banks\u2019 FX platforms and the new payments infrastructure at many emerging market banks. We started with a clean sheet of paper,\u201d Kent said.<\/p>\n \u201cWe wanted to head in the same direction as our customers\u201d<\/p><\/blockquote>\n And from the start, the firm was focused on mobile technology.<\/p>\n \u201cTraditionally, people had gone into a store, bought a calling card or rented airtime and pinged their friends on Skype to make a money transfer. But then they were still handing over cash and paying seven, eight or nine percent in commission,\u201d Kent said.<\/p>\n \u201cBut we saw more and more people using smartphones and we wanted to head in the same direction as our customers,\u201d he explained.<\/p>\n I ask Kent what how Azimo competes with TransferWise, which last year hired 500 people and now handles \u00a33bn ($4bn) a month in transfers, compared with Azimo\u2019s $1bn annual transfer volumes.<\/p>\n \u201cOur average transfer size is smaller,\u201d says Kent. \u201cWhat also makes us unique is our pan-European focus. There\u2019s a big migrant population and many migrants currently rely on European banks, who are exploiting them.\u201d<\/p>\n Moving across to the office whiteboard, Kent demonstrates Azimo\u2019s business model with a flow chart.<\/p>\n \u201cWe take in money mainly via card payments from mobile phones, rather than bank transfers,\u201d Kent says. He explains why.<\/p>\n \u201cInterchange fees\u2014the fees charged by credit or debit card providers for processing payments\u2014are capped by EU regulators at 0.2% per transaction for debit cards and 0.3% for credit cards, which is a good deal,\u201d he explains, contrasting the US market, where interchange fees are uncapped and often exceed 1%.<\/p>\n Kent then explains Azimo\u2019s anti-money-laundering (AML) procedures, necessary to stay on the right side of the global financial police.<\/p>\n \u201cOur AML software checks a number of variables\u2014for example, the amount you\u2019re sending and where to, where you\u2019ve sent money before, your device ID, where you are opening the app\u2014and then does a risk-based assessment. The transaction is either approved, declined or flagged for further review.\u201d<\/p>\n \u201cIt\u2019s not quite free, but it\u2019s very close\u201d<\/p><\/blockquote>\n If approved, the money transfer then proceeds to the currency conversion stage. This happens via an automated software link to a bank specialising in currency dealings, granting Azimo\u2019s clients access to near-wholesale FX market rates, says Kent.<\/p>\n \u201cWe are plugged into the leading FX banks in Europe and trade at maybe 1-2 basis points (hundredths of a percent) away from institutional rates. It\u2019s not quite free, but it\u2019s very close,\u201d says Kent.<\/p>\n In fact, the typical FX conversion has two legs: via dollars, client funds are changed into the local currency of the recipient of the transfer. The final stage is to distribute the money. Again, this process is automated.<\/p>\n \u201cWe have software integrations with the banks who are our payers in emerging markets,\u201d says Kent.<\/p>\n \u201cWe ping them an instruction to pay out and they can do so in cash, to a bank account or, in certain markets, to mobile wallets (such as M-Pesa in Kenya). These local banks charge a per-transaction settlement fee, usually between $1-$5.\u201d<\/p>\n I ask how long the whole procedure takes.<\/p>\n \u201cUS banks don\u2019t have automated real-time clearing\u201d<\/p><\/blockquote>\n \u201cIt can take as little as seven seconds, especially if the payment is going to an emerging market with a faster payments infrastructure in its banking system, or if we are paying out in cash at the other end,\u201d says Kent.<\/p>\n And it\u2019s the creaking payments system in the home of the dollar that stands out.<\/p>\n \u201cBut a recipient based in the US may have to wait a couple of days for a transfer. They don\u2019t have automated real-time clearing.\u201d<\/p>\n Where will the fintech land grab end?<\/strong><\/p>\n The rise to prominence of the digital money transfer firms comes against the backdrop of a booming fintech sector and a banking system that\u2019s under pressure.<\/p>\n In one sense, the playing field is stacked against the banks. Private equity investors seem happy for fintech firms to operate at thinner margins than industry incumbents, spending large sums on marketing and client acquisition and incurring steady losses. N26, Revolut and Monzo all lose money, for example.<\/p>\n But in the money transfer business profitability seems easier. TransferWise, for example, has now reported a second year in the black<\/a>. I ask Kent about Azimo\u2019s financial performance.<\/p>\n \u201cWe decided to take all we make and reinvest it in growth\u201d<\/p><\/blockquote>\n \u201cWe have had a couple of profitable months so far and we expect to be stably profitable by the middle of 2019,\u201d Kent replies.<\/p>\n \u201cIf we\u2019d stopped our marketing campaigns that would have happened earlier,\u201d Kent goes on. \u201cBut we decided to take all we make and reinvest it in growth.\u201d<\/p>\n Kent expands on the sector\u2019s dynamics.<\/p>\n \u201cFor a fintech start-up, the other route to profitability is to keep cheap valuation capital flowing your way,\u201d he says.<\/p>\n \u201cBut I do wonder about some of the recent monster raises we\u2019ve seen,\u201d he says, without naming names.<\/p>\n N26\u2019s January fundraising<\/a> was at an eye-popping valuation of 40 times the company’s revenues, for example, a ratio reminiscent of the dot com era.<\/p>\n Kent turns to fintechs\u2019 path to the public equity markets and the point at which private equity investors and founders cash out.<\/p>\n \u201cWhat\u2019s going to happen when these start-ups get to the initial public offering (IPO) stage?\u201d he queries.<\/p>\n \u201cIPO investors tend to be pickier about valuations than some venture capital and private equity firms, let alone some of the non-traditional sources of capital for fintech firms\u2014for example, big Chinese institutions and sovereign wealth funds.\u201d<\/p>\n![\"\"](\"https:\/\/beta.newmoneyreview.com\/wp-content\/uploads\/2019\/02\/remittances-300x195.jpg\")
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