We are enclosing trends and predictions for the Payment Industry from Professor Arun Sharma who will be a keynote speaker at the IMTC USA 2013 Conference and Trade Fair in Los Angeles from April 3rd to the 5th, 2013. This brief summary will be complemented in his presentation in the conference on Friday, April 5th, 2013.
Dr. Arun Sharma is Executive Director of the JAE Leadership Institute and Professor in the Marketing Department at the School of Business Administration, University of Miami. Arun has extensive knowledge of the Money Transfer Industry through his experience in consulting and conducting seminars. He is has worked for about two decades in this industry and he has conducted studies for multiple firms in the payment services industry.
1) Growth will come from non-traditional channels (internet, smart phones)
The growth in the money transfer business in the next few years will come from digital platforms such as the Internet and Smart Phones apps. The primary driver are middle class customers (and corridors such as US to India), that find traditional channels to be inconvenient and expensive. The secondary driver are lower income families (and corridors such as US to Mexico), whose children are comfortable with technology and have moved from traditional channels to the more convenient tand less expensive digital channels. This trend is expected to continue with some firms (e.g., Xoom) having mostly digital channels. This trend will also negatively affect the revenues of traditional physical location based money transfer platforms.
2) Growth of technology, corridor specific and niche firms – erosion of margins
There will be a dramatic increase in technology, corridor specific and niche players in the industry. First, technology based players will seek to bring standardized processes and scale to the industry. The model will be high fixed cost of development followed by low transaction costs. Second, corridor specific players (who now understand regulation better) will continue to grow, and, this growth in corridor specific players will resume at the rate that was seen before 2001. Third, niche players that provide additional services to customers will increase. Some niche players will provide services that may be as simple as delivering money to recipients in their homes. These services typically attract customers from the top and bottom end of markets. Other niche players will be recipient country firms such as grocery stores/department stores who will sacrifice money transfer profits for customers spending their money at their stores. The traditional model of large firms buying niche firms will not be prevalent due to the proliferation of niche players and low returns on mergers. With increasing competition, margins will decrease.
3) Disintermediation will take place and compliance will not be a barrier to entry
The traditional model of a money transfer firm was a vertically integrated enterprise. Traditionally, firms invested in all areas of the value-chain. The first area of disintermediation was distribution channels in recipient countries, where firms aligned with banks and other money distribution institutions. These institutions in recipient countries in most cases now have multiple money transfer firms as clients. In the present stage more functions are being outsourced, and as an example, MoneyGram is allowing PayPal to access its money distribution network. So where does the market move to next? In the next few years, functional specialist firms will provide more functional assistance to firms. There are firms that currently provide services for inter-bank transfer, compliance and treasury functions. We expect this trend to continue and more third-party providers will be available to the money transfer industry for specific functions. One area of traditional money transfer industry strength – the compliance function, will also be more easily available from third parties and money transfer firms for two reasons. First, third party firms are already emerging that will provide compliance processes to firms. Second, major money transfer firms will recognize that compliance is not be a source of competitive advantage and one or two firms will allow other firms to use their platforms (increasing revenue for the money transfer firm). These third-parties will keep customer data confidential and undertake the burdens of “know your customer.” As a result of all these trends, we should see firms from adjacent markets (e.g., PayPal) to also enter the market.
4) Emerging national firms that provide reverse transfer (developing markets to developed markets) will emerge and compete traditional firms
An area that traditional money transfer firms have ignored is the reverse transfer from developing countries to developed countries (developing countries to developing countries money transfer is also growing). As the volume of transactions increase, competitors from emerging nations will materialize in the next few years. We see this in Latin America with firms such as Delgado Travel, Jet Peru, More Money Transfer and AFEX. As in other industries, these firms will be significant competitors to existing money transfer firms in the next decade.
5) Mobile Money: A technology whose time has not yet come.
There is a lot of excitement about mobile money within the money transfer business. Unfortunately, our research does not suggest any advancement in this area for the next couple of years. The infrastructure, customer access, and affordable fee structures for mobile money does not exist except in a few countries like Kenya. For other countries, de-regulation of the financial sector (away from banks) will be the key in increase of mobile money.
So, in summary, growth will come from digital platforms; disintermediation will take place; competitors will emerge from adjacent markets, corridor specific firms and niche markets; reverse money transfer business will grow accompanied by emerging nation firms; and, mobile money will not be prevalent. For existing money transfer firms, markets will be challenging.
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