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Cards vs Cash: Big Boys vs the Little Guys

Bank of America in 1958 launched the BankAmericard in Fresno, California. The small population allowed them to recruit both card holders and merchants, getting both the “chicken & the egg”. This is an important point that Square founded by Jack Dorsey (founder of Twitter) in 2009, understands well, but more on that later!

The initial launch did not go well for the bank or BankAmericard users, as credit controls were weak and fraud widespread. But they got the system on track and brought in other banks in what by 1976 evolved into VISA. Mastercard was created in 1966 in an orderly manner by competing banks. VISA and Mastercard provide an interconnect platform, between the issuing bank (who provide the card to the holder) and the acquiring bank (who provide the terminal and online facility to accept payment). It’s a thin margin business if ever there was one! As an example; from the 1.5% cost to the merchant, the issuing bank takes 1%, the acquiring bank takes 0.4% and Visa-Mastercard get the thinnest slice, only 0.1%. Small percentages but huge volumes.

What about the “unbanked” market?

Since the unbanked don’t have credit cards they use cash or make a bank transfer. There are alternatives to cash transfers like M-Pesa, the Swahili mobile wallet that is widely used in Kenya and Tanzania. In this system, you only need a mobile phone number to hold, transfer or receive money, allowing users to side-step the entire banking system. No need for a bank account, ATM or credit card. In Malaysia, Tranglo Sdn Bhd, founded by Sia Hui Yong offers cross-border airtime transfers across 100 countries and is now aggressively expanding its remittance business. When asked why the new focus in business direction, Sia replied; “For us it is a natural progression. Airtime transfers and now to money transfers. We have a huge network of service locations, especially in South East Asia region, where we first launched money transfers.”

There is no standard “know your customer” (KYC) protocol across ASEAN, or in-fact globally thereby creating a major problem for companies seeking to operate in multiple markets. XE Trade, the go-to-place to check exchange rates offers money transfers, as does a bunch of other companies; CurrencyFair (Ireland), WorldRemit (United Kingdom) who raised +US$140 million in VC funding, Azimo (United Kingdom, with Africa focus offering free, instant transfers), OrbitRemit (New Zealand), Euronet (Nasdaq listed) etc.

How big is the Remittance business?

According to World Bank data international migrants will have hit an all-time high in 2015, with 250 million migrants remitting US$601 billion back to their home countries, with the developing countries accounting for US$441 billion. The top three origination countries in 2014 were, USA (US$56 billion), Saudi Arabia (US$37 billion) and Russia (US$33 billion).

Different strategies for the old and the new players?

Interestingly Western Union which was built on the back of the telegraph infrastructure in the US offered money transfers (wires) since 1871! MoneyGram was founded in Dallas in 1940 and Ria, was founded in New York in 1987 and acquired by Euronet in 2006. All three companies started by charging exorbitant fees, but stayed relevant by adopting new technologies, lowering their fees and making acquisitions for markets and technology!

Square has built their own eco-system with a POS, payroll, money transfer and recently small business loans, all this in addition to accepting card based payments. Since they offer convenience, no setup fee and cater to small business owners (90% of their customers) they can get away taking 2.75% from the transaction.

Another interesting startup Stripe recently burst into prominence. Founded in 2010 by Irish bothers, John and Patrick Collison who had a novel proposition for the small retailers. They host the card transaction, so merchants don’t need to worry about compliance – all information is stored in Stripe’s vault, which the merchant have access to.

Merchantrade is the largest player in the Malaysian market.

Merchantrade Asia was founded by Ramasamy K Veeran in 1996 and started by operating the now forgotten “overseas calling booths” and selling IDD calling cards to migrant workers. In 2007, they were the first to get an MVNO license in collaboration with Celcom. Ramasamy says on the transitioning of the business; “We had the customer in hand and were effectively a low-cost channel, first for IDD cards, then prepaid mobile cards, but we could see this business coming to an end.” Like the true entrepreneur he is, Ramasamy decided to go into the money remittance business. Merchantrade have grown the business from “bricks & motar” and now offer online transfers to complement the 320 agent locations operating 7 days a week that give them a 48% share of the retail market. The growth of the retail market indicates that demand has extend beyond the migrant population, to the general population and small business owners used to go to banks. Banks are closed on weekends and public holidays.

++++ The full article, appeared in DNA under the title "Cards vs cash: Big boys vs the little guys"

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