Remittance startups are coming in hot
Western Union, you have another startup to keep your eye on — Pangea Money Transfer.
A brief global remittance backdrop:
When people work abroad, they often want to send money back home. This has caused the global remittance market to explode in the past few years as more and more people take opportunities to work abroad. 250 million people worldwide regularly sent money home in 2015, and that number will keep growing with expanded migration.
In 2016, the global remittance market in developing countries was estimated at $585 billion and this number is expected to continue growing. Right now, about 90% of remittance transfers happen offline through traditional cash agents and money wiring services. Many remittance startups are betting that this trend will change and that the proliferation of inexpensive smart phones and the rise of the new tech-savvy generation will pave the way to a thriving online remittance ecosystem.
Sources:
http://blogs.worldbank.org/peoplemove/trends-remittances-2016-new-normal-slow-growth
https://www.regalii.com/blog/why-90-of-remittances-happen-offline
Where is the money going?
In absolute dollar amounts, India, China, the Philippines and Mexico.
Generally the high volume corridors (ex. US to India) are more concentrated with only a few players dominating the space
Watch out incumbents, startups are coming for you.
In light of this trend, Venture funding to money transfer startups has increased rapidly in the past five years.
So who are the major players here?
In one corner we have the incumbents: Western Union, MoneyGram and Ria dominate the non-bank market. Traditionally, the remittance industry has been dominated by cash, which requires heavy investment in physical locations where customers can go to send and pick up money. Western Union commands the largest market share and the largest network with over 500,000 agents in more than 200 countries, supporting 130 different currencies. Customers can transfer money online, via mobile app, or in person. MoneyGram is next up, with over 350,000 agents in 200 countries. Customers can transfer money online or in person. Finally, Ria has 310,000 agents in 150 countries but only offers online transfers for U.S. customers. All of these companies allow recipients to pick up money via cash pickup, or direct deposits into bank accounts. All three of these companies make money from two key sources: transaction fees and exchange rate margins.
In the second corner we have the challengers: remittance startups are looking to disrupt the traditional remittance model of physical locations, removing a large amount of cost from the legacy business model. These startups seek to compete with more efficient infrastructure, lower fees, and better user-interfaces. The four most well-known and well-funded startups include: WorldRemit, TransferWise, Remitly and Azimo.
So how do these challengers stack up?
The incumbents still dominate the space, and while the top 4 startup challengers have gained ground, there is still no clear winner.
Let’s talk about margins.
While the total transfer volume is close to $600 billion, the amount of revenue remittance companies can take is only about 6% of that. Margins have been falling steadily for the past 3 decades, dropping 30% in the last 7 years alone.
While the weighted-average margin for the whole industry is around 6%, the incumbents and the digital-only challengers have different business models and customer bases. Each provider has a unique mix of corridors it supports, and a different mix of online and offline senders. Offline senders are much more profitable, which is why you will see a large difference between the margins of the established players with predominantly offline senders vs. digital-only providers.
As you can see, digital-only providers generally have lower margins. More on this caveat later on.
Now that we have a background on the space, let’s talk about Pangea.
Pangea’s advantage is all about convenience, simplicity and transparency. They released the first debit money transfer product in 2016 which provides the first real-time way to transfer money to Mexico, Colombia, Guatemala, El Salvador and the Dominican Republic using the PAN on a debit card, rather than bank details which are often difficult to find. Using any U.S. debit card, customers can use the mobile app, web portal or retail partners to send money and receivers can access that money through their debit card, bank account, or over 18,000 cash pickup locations.
Stated mission on their website:
“Pangea started with the mission of making money transfer simple, fair, and safe. Since then, we’ve been striving to enhance the security and reduce the cost and pain points of money transfer. Our mobile app allows users to complete a transfer in less than 30 seconds and pay with any US debit card. Receivers in Mexico, Colombia, Guatemala, Honduras, El Salvador, and Dominican Republic can collect the money at a cash pickup location or directly into any bank account in minutes. Register for free and start sending money faster! No lines. No hidden fees. More savings.”
http://www.businesswire.com/news/home/20160303005182/en/
Where is Pangea’s market?
Pangea operates primarily in transfers from the US to Mexico and Latin America. Looking at remittance corridors, the US to Mexico tops the charts with over $24 billion sent in 2015.
How does Pangea stack up relative to the competition?
Pangea charges a flat fee of $4.95 for all money transfers. Let’s look how this compares to the more established players (note, this is just a comparison of transaction fees, not including FX fees):
Overall Pangea offers a faster, more flexible service for about the same cost as competitors (with the exception of Remitly). This advantage is far more pronounced when you compare Pangea’s $4.95 fee outside of the US to Mexico corridor. Most existing providers of money transfer services rely even more heavily on traditional cash agents in these spaces. The table below summarizes the average transaction fee of all remittance providers vs. Pangea for the less-established corridors:
As you can see, Pangea offers a clear advantage from a transaction-fee perspective in these less established corridors. This could help convincing potential customers to switch from traditional cash agents to Pangea’s platform.
Adoption
One of the most critical determinants of success for any of these money transfer startups is convincing remittance senders to switch to online methods; and once they switch, winning loyalty through excellent service and enhanced convenience. So far, Pangea is off to a good start with a 4.3 star rating on the android app and over 600 positive reviews.
As far as retention, Pangea leads the industry with 65% repeat customer usage rates. This has resulted in 800% increase in YOY volume growth.
Source: http://www.pymnts.com/businesswire-feed/pangea-money-transfer-appoints-nishu-thukral-as-new-ceo/
Funding
Pangea has raised $20.42 million, finishing its series B fundraising at $11.62 million in December of 2016. Investors include Ignia Fund, KDWC Ventures, Jump Capital and Wasson Enterprise. These investors share confidence in Pangea’s ability to reshape the global remittance market.
“Over the years we have been involved with numerous payments companies. Pangea’s innovative approach to money transfer and potential to scale sets it apart from others in the space. We believe the product will have a lasting impact on the way millions of consumers transfer money. We were impressed by the team’s experience and product vision and are excited to support Pangea and help scale the product globally,”
- Richard Kiphart
Caveats
While there is no doubt the global remittance market looks like it’s ripe for disruption, there are a few caveats that could throw a wrench in things:
- Revenue margins will continue to shrink in the remittance industry — Although the global money transfer market is close to $600 billion in transfer volumes, the revenue pie is around $35B with around 90% of the transfer volume in cash. As consumers switch from offline to online (assuming around 30% in the next 10 years) the revenue pie continues to shrink.
2. The shift from offline to online is inevitable, but crawling at 1–2%
3. Incumbents have their own online-mobile startup tools that could provide comparable service to startups
4. Compliance and cybersecurity costs are expensive and will continue to grow, this could jeopardize the bottom line for startups
Source: https://www.saveonsend.com/blog/money-transfer-startups/
Conclusion
Pangea has a product that adds value to the consumer by increasing convenience and speed of transferring money. If Pangea can find a way to speed the shift from offline to online, retain customers and keep compliance and cybersecurity costs down they could have a winning, scalable strategy. While there are already lots of established players and emerging startups in the larger corridors (ex. US to Mexico) it may make more sense for Pangea to continue focusing on less-mainstream markets (ex. US to Dominican Republic). In these markets, their value proposition is much stronger and they have more room to expand revenue margin if necessary.
