Disruption in Cross-Border Money Transfer (Remittances)
Disruption. I have a love/hate relationship with the word. I love what it means and stands for, however, I hate it when it is used as a misnomer. I digress. I had to get that in.
For the past couple of months, I have very acutely been studying the business models of over 200+ money transfer companies. From the giants, to the new kids on the block, to the lone Mom & Pop store, trying to cling on for life and every variation in between.
The Money Transfer ecosystem has some great business models. However, three models particularly stand out. Two of them I will mention briefly below.
- Abra model, which is a essentially a peer-to-peer money transfer model that hinges on what I call the human-ATM approach (Abra, very correctly names it as a Teller). You can click on this link to learn how Abra works.
- Uphold is the other model. Uphold was previously called BitReserve. To really understand Uphold, I recommend watching their video (see below) and reading this fantastic article on Medium: The Internet of Money Is Here
Both these models no doubt are very good. Which brings me to the third model, one that hasn’t been considered as of yet, however, before I delve into the third model (option?), I do want to give a few background notes.
Points Worth Considering
Most small (read independent) money transfer companies are single location, brick and mortar stores. Less than 1/5th of them have multiple stores, however, most of them operate in a single state (or territory) in which they are licensed (taking the US as an example).
Couple of points that can be summarized and applied to all:
- Limited capacity to invest in technology
- Economies of Scale not applicable to them
- HR limitation on new technology investment, business development and compliance
- Marketing is always a challenge
- Losing customers who are gravitating to other providers who offer more bundled/unbundled services
- Limited corridors
- Limited pre-funding options
- Online marketing and lead generation knowledge limited
- Tying into innovative payment networks or payment products
- Specialize in 1 -to- 3 types of Diaspora from which bulk of the business is generated
- Great rapport within the community
- Would love to take on more business but pressed for all sorts of resources
With these points in mind, the question that begs to be asked is, why isn’t the Uber model being applied to the Money Transfer Operator industry?
Uber for Remittances
Uber is just an app. They don’t own any cars, or employ drivers or pay for their insurance. Uber is the app connector. It presents a marketplace where people (i.e. Customers) who want a ride and Uber Drivers can match themselves and then execute a transaction (i.e. a ride + payment).
Take a look at the map below…
In every state there is a money transfer company (definitely more than one in each major city), a small (mom & pop MTO) or a mid-sized MTO. Now imagine bringing them together under a single branded app? distributed MTOs who have never done business with each other can now be assembled under one unified umbrella.
The result? You now have a 50 State Licensed Money Transfer App.
You can not leverage the power of the network to onboard transaction from any State. Bring them under a single app/dashboard to onboard transaction, unilaterally increase the tie-ups they have (more beneficiary countries), be the data monitor on record for all transactions, partner up with a SaaS provider for compliance and offer the same to all (remember economies of scale kick in here). No harm to existing business. Best of both worlds (on-line and off-line).
Before you ask, what about settlement? who does the client belong to? is this allowed under the current regulations? etc. The answers are all in favor of such a model.
First and foremost, the platform or app, would be an ISO or each MTO that you sign up. Since the service doesn’t touch the funds, they are not classified as a money transmitter or an MSB.
Secondly, the app, overlays, the booking of a remittance over each MTO’s existing system. So no changes there.
Third, how is settlement done? So a person books a transaction from Chicago (Illinois) to Manila (Philippines) – via the app, how does it work:
Well here is a suggested path towards execution:
- Order is routed to the MTO in Illinois, whose license is being used.
- The payment (ACH) pull is done by a 3rd party directly into the MTO’s account.
- The MTO would execute the transaction based on the pricing/FX that they provided (to the app).
- Once the transaction is executed, they update the app.
Another way to go about it is to assign one MTO or a licensed payment network as the official clearing network on the backend, for example Earthport, Tipalti or Currency Cloud.
I will be selfish and say, I have spent many weeks figuring this out, and it is not overly complex. Pretty easy to architect this. the idea here is to look at the broader picture of being able to take a decentralized, fragmented market of individual MTOs and bring them under one platform. Whilst Uber is a great example, the idea essentially came from reading this article on OYO Hotels in India and from the association/network of Leading Hotels of the World and AirBnB.
I am beyond convinced that this is possible. All it needs is a little bit of hard work to setup up the basic schematics and rules as to how all these MTOs will be vetted, screened, on-boarded, integrated, pre/post customer support, etc.
Rather than trying to reinvent the wheel, there is ample of opportunity in trying to bring the power of many, onto a single platform.