Competition in the money transfer space is heating up in a serious way. Ever since Transferwise showed the world it could beat the banks, fintech startups have been sprouting like mushrooms. As we speak, countless firms offer low/no fees, and exchange rates with slim margins.
Unlike these young upstarts, WorldFirst has been around the block plenty of times. Nick Robinson and Jonathan Quin, a pair of London finance industry veterans, founded the firm in 2004. They offered bank-beating rates years before Transferwise but struggled to gain a foothold.
Why did they have a longer growth trajectory than Transferwise? Several factors played a role, but mostly, they came into being before internet commerce became widely accepted. With most consumers now comfortable with online transactions, life has become easier for B2C and B2B money transfer companies.
Or, at least, it was. Ant Financial, the financial services arm of Chinese-owned Alibaba, recently acquired WorldFirst. Shortly afterward, they made aggressive changes to their pricing model by mimicking Transferwise’s.
What is behind this shift in strategy? What does it mean for the money transfer industry as a whole? In today’s blog, we’ll explore the how and the why of this decision, and its implications.
WorldFirst has made aggressive changes to its pricing model
The banking world used to be a much shadier place. Even online, it was unclear what specific financial institutions charged. Disclosure of fees and rates was something that banks just didn’t do. Transferwise changed all that.
All of a sudden, a generation that valued transparency could see exactly what they were paying. Users flocked to the platform, leading to the rise of a payment giant. Nearly a decade later, WorldFirst is following suit.
When you surf over to their website, the prices they offer are now easily visible. Before their acquisition by Ant Financial, they only disclosed rates over the phone. What’s more, they’ve dramatically slashed their margins to undercut their competition. Individuals can now transfer money within 0.5% of the interbank rate. If you operate a business that moves large quantities of capital, prices within 0.15% of interbank are attainable.
With scores of companies (e.g., Transferwise, OFX, TorFX, etc.) fighting over market share, WorldFirst has put them in an adapt-or-perish scenario. And so, the race is on.
What was behind the meteoric rise of Transferwise?
It’s obvious to even casual observers – a price war is brewing in the money transfer industry. Before we discuss it any further, though, let’s get some background on the principal players.
Less than ten years ago, Transferwise was little more than an unusual (but highly effective) financial arrangement between friends. Today, it is the world’s second-largest money transfer company. What happened on the road from point A to point B?
Let’s start at the start. Back in 2010, Taavet and Kristo had a problem. They both lived in the UK, but their bottom lines were getting savaged by the banks. Kristo had a mortgage back in Estonia. Taavet worked for Skype, which was also based in Estonia. Every time they moved money, they lost hundreds of Pounds Sterling.
One day, they had a Eureka moment – why not check the interbank rate, and transfer money to each other? When Taavet got paid, Kristo would pay him the GBP equivalent from his UK bank account. In return, Taavet would reimburse Kristo when he had to pay his mortgage.
This model became the basis for Transferwise. When they launched in 2010, in return for a low fee, they offered customers the interbank rate. That’s wasn’t their only innovation – on their home page, they showed their work. Unlike other money transfer companies, they disclosed their rate AND their fees upfront.
No one had ever done that before. By 2015, Transferwise was worth 1 billion USD, and by 2017, they were moving 1 billion USD per month. They are now the world’s second-largest money transfer company – only Western Union moves more capital per month.
WorldFirst: One of the internet’s money transfer pioneers
Despite their present role of challenger, WorldFirst predates Transferwise by six years. The UK-based money transfer firm made its first trade in 2004. Back then, banks and legacy institutions like Western Union dominated the industry. Businesses, who had begrudgingly accepted terrible rates, were hungry for an alternative.
Despite this sentiment, WorldFirst grew slowly in its early days. Fifteen years ago, people were skeptical about the safety and sustainability of e-commerce. Nevertheless, they gradually won over early adopters, and so, their reputation as a real alternative to the banks grew. By the 2010s, businesses and consumers alike became more amenable to the idea of conducting financial transactions online.
As such, their fortunes swelled. By 2014, they were moving 12 billion USD – or 1 billion USD per month. Look at WorldFirst money transfers data for 2019 – by then, they had become a force to be reckoned with on the global stage.
WorldFirst appears to be going after Transferwise’s market share
In 2019, Ant Financial acquired WorldFirst in a deal worth approximately 700 million USD. Since their rebranding in 2014, they had been looking to add currency exchange to their suite of services. At first, it appeared Moneygram would provide them with the infrastructure they desired.
Alas, the Committee on Foreign Investment in the United States, or CFIUS, shot down the deal. Not deterred by American Sino-skepticism, Ant Financial moved on with their search and eventually settled on WorldFirst.
Shortly after their acquisition, a change in strategy became readily apparent. For years, WorldFirst had depended on the faithfulness of its B2B client base. Now, they are eager to win back clients that have defected to competitors like OFX, TorFX, and Transferwise. In recent weeks, some competitors had increased their margins. WorldFirst chose this moment to strike – in some cases, their rate is now 85% lower.
On top of this, they’ve posted fixed rates on their site for everyone to see. Many B2B-focused money transfer services still require clients to negotiate rates over the phone. This bold move puts WorldFirst in a dominant position over their opaque rivals. Haggling consumes time and energy – now, clients get a low guaranteed rate, minus the hassle.
Who initiated this dramatic change in strategy? It’s not clear. It’s possible CEO Johnathan Quin had a “Eureka moment” over the past few months. However, Mr. Quin had nine years to copy Transferwise’s approach. When you add the ownership change to the equation, it’s not hard to imagine Ant’s executives had something to do with it.
Is the entire money transfer industry about to race to the bottom?
Generations of an unchallenged monopoly had created a huge opportunity for money transfer startups. From Transferwise to World First to OFX, many great fortunes have been made over the past decade. However, just like the early days of the automobile, we may be on the verge of a great bloodletting.
At various points in American history, 3,000 different car companies existed. As of 2019, only three major automakers remain – GM, Ford, and Fiat Chrysler. Accordingly, dozens of money transfer companies may cease to exist 5-10 years from now.
Money transfer is a brutally tough business. WorldFirst has thrown down a massive gauntlet – smaller competitors will struggle to match/beat margins of 0.15%-0.5%. To pay bills, employees, and shareholders at these rates, you need insane volume.
Transferwise has the B2C market locked down, and a healthy share of B2B clients – they will survive a price war. WorldFirst also has a sizable stable of B2B customers – along with Ant Financial’s deep pockets, they’ll also come out alive on the other end.
The real question is this: how will the OFX’s TorFX’s, and Currency Directs of the world respond?
Competition = great news for money transfer customers
Competition (and lots of it) is excellent news for consumers. Businesses and overseas workers used to give up 5-10% of their transfer in fees. Now, in some cases, costs are fractions of a percent.
However, as this price war rages, causalities are inevitable. If too many firms close shop, an oligopoly, or a market where a few players set high rates, may form. In the end, time will tell. For now, however, there’s never been a better time to transfer cash internationally.