An argument that’s used against new remittance companies is that consumers don’t trust fintech startups to move real money. Companies like Western Union may be more expensive, but customers feel more secure with them. Remittance is a big deal for those who send money back home to families, and customers don’t want to run the risk of having their cash lost by new digital solutions.
But a payments pioneer just released a digital remittance service that may provide more consumer confidence. The new integration of Xoom is PayPal’s answer to digital remittance. Xoom isn’t new to remittance (it was founded in 2001 and bought by PayPal in 2015), but gets an upgrade with “Powered by PayPal” under its logo.
“PayPal can offer more services to its global customer base, which we believe will increase customer engagement,” said Julian King, PayPal's vice president, chief marketing officer, and business development, Xoom. “We’re very excited to announce that Xoom is now integrated into PayPal.com, which will cross-sell Xoom’s services to PayPal users in the U.S.”
In conjunction with the new integration, PayPal released a white paper on the costs of remittance. In its marketing, Xoom emphasizes its contribution to the UN Sustainable Development Goal and its work towards lowering remittance fees. Using data from the World Bank, the firm found the average remittance transfer through brick-and-mortar firms like Western Union cost seven and a half percent of the money in motion. Xoom costs users less than four percent. With 2016 remittances set to hit $600 billion, the difference in fees could reduce fees by $21 billion.
“Those savings have the potential of lifting nearly 30 million people out of poverty, according to the UN Center for Trade and Development findings,” remarked King. “We’re starting to see the impact in savings from digital technology and are on our way towards achieving the UN Sustainable Development.”
Xoom stresses lower fees, but looking closer at the numbers, something doesn’t compute. Compared to companies like Western Union and Ria, Xoom is cheaper. But when looking at other digital solutions like TransferWise and WorldRemit, Xoom doesn't hold up well.
Remittance fees can be placed into two categories: how good of a forex rate you get and how much the transfer of funds costs. Xoom gives a better forex rate than traditional remittance companies, but worse than other digital solutions. Additionally, Xoom's transfer fees are comparable to other digital remittance companies. But when sending funds from a debit or credit card, users have to pay nearly $25, an astronomical amount for this type of transaction.
King claims consumers have responded to Xoom that they are happy with fees, but points to other factors when determining the true value of remittance transfers.
“We’re trying to match cost to the value that we’re delivering…You can’t solely differentiate on pricing in this industry because it depends on so many different factors. Because of the emotional significance of these transactions, consumers choose a service based on overall value and convenience that they get for a service,” he concluded.
Value, in the case of Xoom, seems to be transferring funds via an established payments company versus a fintech upstart. Even though fees and forex rates aren’t as bad as banks and remittance incumbents, customers will continue to pay a premium for a more established remittance service.