PayPal-TIO deal could increase Venmo revenue, utility

PayPal’s merger strategy has long been focused on digital offerings. Reaching the physical world, however, has been a real challenge for the payments giant.

Now PayPal is trying to change that. The recently announced acquisition of Canadian bill pay service TIO Networks for $233 million would not just give them greater reach but a greater opportunity to work more with people who are excluded from the banking system.

“It’s been clear for a while that PayPal has a vision to democratize financial services,” said Anuj Nayar, head of global initiatives at PayPal. “A lot of this stuff we’re doing specifically to hit the underserved. People are being disenfranchised … it’s incredible how high a proportion of the U.S. population couldn’t raise $400 in an emergency.”

About 15 percent of U.S. consumers don’t have a bank account, according to Pew Charitable Trusts. For many of them, digital financial services seem ill-suited to their needs since they deal mostly in paper checks or cash. And while targeting people off the financial grid is laudable, the deal, which is scheduled to close in the second half of 2017, is as much about the transaction volumes PayPal would acquire, if not more, as servicing the unbanked.

When the company announced its quarterly earnings at the end of January it highlighted the successful growth of PayPal-owned Venmo, which processed $5.6 billion over the quarter, up 126 percent from the previous quarter. But Venmo transfers are free for users and PayPal doesn’t make much from them. Similarly, people making cash payments to billers are probably doing so through a kiosk or 7Eleven, Family Dollar or other retailer, said Michael Moeser, Javelin Strategy & Research’s director of payments.

“PayPal makes [revenue] when you use its wallet at a merchant,” he said. So by bringing billers into its network PayPal argues that it’s creating more opportunities to generate fee revenue.

If PayPal can get data on people who are outside the mainstream financial system, and as a result, aren’t on the radars of credit bureaus, it could potentially help build and maintain records of the volumes of data that show people’s financial integrity and responsibility, said Ramesh Siromani, a partner in the financial institutions practice of A.T. Kearney, a global strategy and management consulting firm.

As important as it is to bring attention to and target these customers, this deal, for PayPal, is still all about adding more ways to get volume into its business that wasn’t previously there. TIO processed $7 billion in bill payments in 2016. It boasts 14 million customers, 10,000 biller partners and 65,000 retail locations.

In the long term, PayPal could use the TIO network to bring more utility to the Venmo app, Moeser suggested. PayPal declined to comment.

“Say you and your three roommates get a collective utility bill, and one person is getting the funds from the other roommates so he or she can pay that utility bill,” he said. “When you get money from your roommates you don’t have to go to a separate function or log into your mobile or online banking, you could do it all from your Venmo wallet and there’s an opportunity for Venmo to get some sort of interchange [fee] from that biller.”

Nayar did not comment on the company’s future plans beyond the deal, which has still not been completed. For now, he said, PayPal is focused on serving customer needs, and finding a way to bring people with limited financial access into its business and into the mainstream financial system is on deck.

“Across the board we’re focusing on needs of customers,” Nayar said. “PayPal’s are two fold: merchants and consumers. For both of them there is a massive unmet need and PayPal is sort of the only global third party payments network that does it all at scale — we have three digital wallets in total,” he added, referring to the PayPal digital wallet, Venmo and Xoom.

For the last five to 10 years, the conversation around financial inclusion has drawn attention to the exorbitant fees people end up paying just to cash a check or send money to family in a different country. In that time, technology developers have built software that allows them to perform these basic functions for little to no fee, and more quickly.

Adopting these technologies aren’t as easy as it sounds though, said David Sica, a principal at venture capital firm Nyca partners. There’s a huge financial literacy component that could be addressed through great marketing and product design.

“What often gets missed is the consumers trust that check casher, they trust the service that for the last 20 times they’ve used it does what it’s supposed to do,” he said. “If I’m a check cashing customer, I’m not going to rock the boat. I’m going to go where I know I can cash the check and remit and I’m fine paying the fees because it’s more important to get it done. It’s unrealistic to think the unbanked, underserved population will start acting and behaving like a Venmo customer on day one.”

With new bank partnerships, TransferWise tries for transparency

transparency in finance via Transferwise

As customers clamor for more from their financial service providers, small players of the big financial game are responding with their own versions of transparency.

Hidden inside the $5.3 trillion daily forex trading market are everyday people transferring money abroad to friends, family, or for personal use. Fintech startup TransferWise was founded in 2011 with the aim to eliminate margins and hidden fees that everyday people pay when transferring currencies through financial institutions. When an average person — not professional forex experts — transfers currencies, it’s not exactly clear whether they’re getting screwed on an exchange rate. By splitting the difference between the buy and ask price of currency exchanges and charging a nominal fee instead, TransferWise brings a breath of fresh transparency to a small corner of the forex market.

Transferwise differs from normal moneychangers in one substantial way: TransferWise facilitates transfers between users themselves instead of acting as the bank. For example, someone who wants euros in exchange for dollars is matched with another customer wishing to transfer euros to dollars. So, instead of a bank purchasing the funds at a premium and charging service fees, trades are matched with other users on the opposite side of the trade.

In data sent to Tradestreaming, TransferWise operates over 600 routes and in 35 different currencies, and claims it has over a million customers conducting $750 million worth of transfers per month. The fintech player charges a fee on every trade, visible to both parties before the transfer is complete. By letting users know the exact fees before transfers are executed, TransferWise attempts to eliminate hidden fees by injecting transparency to a small corner of the forex market.

Two studies in transparency

Transparency in the financial industry is an important topic- especially for millennials. According to Edelman’s 2014 brand share study, 87 percent of respondents said they want more meaningful relationships with the companies they do business with, including more transparent communications. “This includes with their money managers, advisors and banks,” wrote the authors of the yearly report that analyzes the changing relationships consumers have with brands.

Deloitte’s 2016 Millennial Survey also demonstrates the importance of transparency. 25% of millennial respondents said that trust, integrity and honesty were the recipe for successful businesses in our age. With this wind at its back, Transferwise has embarked on a distribution strategy that includes bringing its brand of transparency to partnerships with banks.

New banking partnerships

In February, TransferWise announced partnerships with two boutique banks: Estonia’s LHV and European digital bank Number26. Through an API integration, clients of these banks can access the TransferWise currency exchange service directly through their banking apps.

Through discussions with other financial institutions, it became clear that even smaller banks are looking for solutions that set them apart from the status quo, differentiating the services they offer.

“Transparency is very important to us,” wrote TransferWise’s Director of Communications, Jo White, in an email to Tradestreaming. “When you go and buy a pint of milk, you know exactly how much it’s going to cost… we don’t see why international money transfer should be any different.”

By partnering with banks, TransferWise is finding a way to reach more potential users. The company seems intent to sign more of these types of partnerships in the future.

“We hope to work with other banks and companies from other sectors, too. It’s about making international money transfer as easy as possible for people,” White said.

TransferWise Petition


Transferwise is also active socially with its theme of transparency and that comes through in the company’s marketing. The company created the nothing to hide protest against hidden bank fees, and currently supports a petition to stop hidden bank fees.

Not so fast on transparency

The desire for transparency is palpable, but change isn’t going to happen overnight. TransferWise represents just a microscopic share of the forex market– it’s existence affects less than .01% of currency transfers. Outside of forex, the partnerships TransferWise has made are with banks that already drank the transparency kool-aid. Furthermore, it’s unclear if the relationships TransferWise has made with banks will bear fruit. Number26, one of the startup’s first bank partners and touted as a leading digital-only bank, recently had to shutter a few hundred of its accounts when it found some of its early clients were making an extremely high number of ATM transactions.

Water on a rock

As TransferWise inks more partnerships, the transparency itch may slowly start to spread to other institutions. A total shift towards transparency isn’t going to happen tomorrow. However, like water drops on a rock, as more upstarts demonstrate that they can build bigger, transparent businesses, the possibility of greater transparency in the financial industry inches closer to reality.

Photo credit: Georgie Pauwels via Visual hunt / CC BY

Competition in hot pursuit, Western Union continues to lead

165 year old Western Union stays ahead of competition

Dozens of startups have opened in the last several years touting faster and cheaper ways to send money abroad. These digital-native companies like U.K.-based Transferwise and WorldRemit, along with Paypal’s Xoom, say their goal is to disrupt the money transfer sector, long associated with high fees and waiting in lines at kiosks with a pile of cash.

But the industry’s grandfather, 165-year-old Western Union that started out sending telegrams, does not seem to be losing its foothold. Western Union’s share of the cross-border transfer market has hovered around 14% for the last five years, according to independent research and consulting firm Aite Group. And no startup has more than a 1% market share, according to Aite.

“It’s a lot harder to take them out than a lot of people think,” said Brett Horn, an analyst at Morningstar. covering the money transfer sector. “Western Union looks very outdated, but when you look below the surface, that’s not the reality of it.”

How a 165 year old financial services firm competes

This is partly because Western Union, unlike the upstarts, maintains a wide network of bricks-and-mortar locations that can send cash, which is still a staple in much of the developing world. The developing world accounts for $432 billion of the $582 billion global remittance market, according to the World Bank.

But it is also because Western Union has embraced the rapidly growing world of do-it-yourself online transfers, mobile payments, and even cryptocurrencies like Bitcoin, as it is well aware of the digital shift in the remittance market.

Only 7% of remittances in 2015 were digital, according to Aite Group.  This is because digital transfers, the bread and butter of startups, often require a credit card or bank account, something lacked by the 38% of the world’s residents who are considered unbanked, according to the World Bank. But the numbers of unbanked people continue to fall rapidly, with a recent report from the Global Forum on Remittances and Development estimating that cash-based remittances will only remain dominant for another five years.

Western Union is prepared for future cash trends

Western Union continues to prepare for this widening shift away from cash, offering online transfers to bank accounts in 33 countries, and the ability to send money to mobile phones in 13 developing countries, where consumers can use the funds in their mobile wallets to pay bills and buy goods without having a bank account. All of these efforts overlap with services offered by startups.

“Western Union is still a giant, but even giants like Western Union are changing their business model,” said Pedro De Vasconcelos, manager of the International Fund for Agricultural Development’s Financing Facility for Remittances, which aims to promote innovative and affordable ways for people to send remittances to poor, rural areas.

In another attempt to keep up with the rapidly changing financial world, in April Western Union invested an undisclosed sum in Digital Currency Group, an investment firm focusing on bitcoins and the technology underlying them, blockchain.

And last year it launched WU Connect, which allows money transfers through social media and messaging applications like Viber.

New technology just part of the formula

But because the fees are lower for the digital transactions that are likely to replace a growing number of in-person cash transfers, in order not to die a slow death, Western Union must maintain its market share rather than let it slip away to startups.

“For incumbents, like Western Union  there is an erosion of their margins and they are being forced to tighten up operations,” Talie Baker at Aite wrote in an email to Tradestreaming. “As prices continue to decline, incumbents will be challenged to migrate their existing customer base to digital forms of remittances as well as attract the millennial generation who may be attracted to some of the startups over Western Union.”

Analysts also pointed out that there are many lucrative niches and sub-sectors in the cross-border money transfer market, such as offering other financial services like savings accounts to unbanked customers, and that many startups are actually targeting these areas.

“There are many places for startups to go without bothering Western Union,” Horn said. “It’s not contradictory to say that Western Union is going to maintain its business and that there is also a lot of opportunity for upstarts.”

Photo credit: Eleaf via / CC BY

How Remitly’s Matt Oppenheimer built a mobile-first remittance company

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Matt Oppenheimer is CEO of Remitly.

What is Remitly and where did you get the inspiration to found it?

Matt Oppenheimer - Remitly
Matt Oppenheimer, Remitly

Remitly is a mobile payments remittance service that is changing the way people send money internationally. I was working for Barclays in Kenya where I saw first-hand the challenges and strain on people trying to send money to family members overseas. We have taken careful steps since launching in 2012 to create a fast, reliable and transparent service.

Payments is getting really competitive — how is Remitly different?

Historically, remittance services have been defined by companies like Western Union and MoneyGram offering high and hidden fees, poor user experience, and limited mobile and web options. For years, tech companies have worked to erode the financial services industry. Remitly isn’t the first company to disrupt the status quo, but we are taking a very different approach from our peers. We’re putting our customers first but going super deep where the biggest addressable markets and pain points exist.

The typical software company in our industry counts vanity metrics such as the number of regions served. Our measures of success are different. We value customers above all else so we offer a great experience at a reasonable cost.

You provide service into 3 specific geos — why did you chose those? What goes into the decision about which corridor to service? Are you going to launch new corridors?

We purposely focus on three targeted corridors – India, the Philippines and Mexico – to get the product right and deliver on promises to customers. They are also three of the top five largest receive corridors in the world – U.S. to Mexico alone is the largest international remittance corridor. It takes a lot of work to perfect a money transfer between countries, regulators and financial institutions.  Now that we have this product, we’re scaling up globally and continuing to stay focused on the largest corridors where there are the most customers to serve.

How important is mobile in today’s remittance market?

It’s not just important, it’s critical. We built the first truly mobile-first remittance company. While others are trying to move offline businesses to the web, we focused first on mobile. We were the first to enable Touch ID for iOS users, we were the first remittance service with built-in messaging capabilities and we were the first and only service to provide an app for both the sender and receiver. Everything we’ve done with mobile has been in service of enabling easier and more meaningful experiences for our customers.

It’s important, however, to recognize when mobile fintech solutions are not solving customer pain points. One hype-filled example is mobile wallets: stored value accessed via a mobile device often built by carriers and banks. I offer one data point to cut through the hype: If you take a random set of 100,000 money transfer transactions at Remitly, roughly 19 of them will involve mobile wallets. That is a whopping 0.019 percent of our customers, generally tech-savvy folks who are using a mobile fintech service, who use the app to send money to mobile wallets.

What’s in the pipeline for 2016?

We’ve grown our company into the largest independent digital remittance firm in the U.S. and we’re committed to continue to grow our business and build new features into our product to enable deeper and better connections for our customers. In 2016 you can expect to see us open up new receive and send corridors and introduce new product features to our service.

[podcast] Why a 164 year old payments giant partnered with the hottest social media tool on the planet

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One of the themes we’re tracking here at Tradestreaming is the confluence of incumbent financial institutions with new technologies, platforms, and tools. When you look at some of the largest and oldest financial institutions, some are indeed embracing the future.

Western Union is one of those firms. You’re probably familiar with the fact that Western Union provides consumers and businesses with a variety of ways to send and receive money around the world. Through multiple brands , the company, which is 164 years old, has built a combined network of over 500,000 agent locations in 200 countries and territories and over 100,000 ATMs and kiosks, giving it the capability to send money to hundreds of millions of accounts. In 2014, The Western Union Company completed 255 million consumer-to-consumer transactions worldwide, moving $85 billion of principal between consumers, and 484 million business payments.

David Thompson, CIO of Western Union
David Thompson, CIO of Western Union

The scale is pretty staggering and what’s interesting is how the firm is embracing some of the same tools its customers are using. A recent study by McKinsey estimated that by 2020, 12% of global remittances will be initiated via social media and communications platforms. To this end, earlier in the fall, Western Union launched the WUConnect service, which opens Western Union’s internal transaction processing network to platforms that want to offer social and text payment capabilities to their own customers.

The company created application programming interfaces and a software developer’s kit to let social networks, like Facebook, access the service. And just a couple of weeks ago, the company announced that WeChat, the Chinese communications platform, is rolling out an integration that would enable its 650M active users to send money to one another over the WU Connect service.

David Thompson, Western Union’s Chief Information Officer, joins us today on the Tradestreaming Podcast to discuss how his firm views the convergence of social, technology, and finance and how he’s helped manage the internal processes to ensure Western Union stays competitive and relevant throughout the evolution of today’s technology.

Listen to the FULL episode

What you’ll hear in this week’s podcast:

  • The inherent socialness of payments and why it makes sense for apps/social platforms to offer peer to peer payments
  • WUConnect, Western Union’s API / SDK suite to integrate cross-border payments into social media networks
  • What’s driving the partnership with WeChat, China’s leading social media communications platform with 650M monthly users
  • How payments can drive additional stickiness to large social platforms
  • Strategy drill-down on Western Union’s global leadership in cross-border and digital payments
  • How Western Union’s competitiveness is driven by a large investment in regulatory compliance in 200 countries around the world
  • David’s view on the challenges in cross-border, cross-currency money transfer and what he and Western Union have done to solve for these
  • Why McKinsey believes that by 2020, 12% of global remittances will be initiated via social media and messaging platforms
  • What David has planned for new types of partnerships in 2016 as well as new functionality slated to be launched as part of WUConnect


This week’s episode of the Tradestreaming Podcast was sponsored by Collective2 — automated trading for humans.

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Photo credit: sandklef / Visual Hunt / CC BY-SA