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American Banker: Remitter Vies for Shelf Space in Small Banks

David Breitkopf, American Banker, June 21, 2006

The San Francisco online money transfer company Xoom Corp. has introduced a white-label remittance service for banks and hired an expert from Wells Fargo&Co. to help run it.

Several large banking companies, notably Wells Fargo and Bank of America Corp., are already major players in the remittance business. Xoom is betting that regional and community banks, which might be hard-pressed to build such a service on their own, are eager to jump into the market to serve their immigrant customers and attract new ones.

To persuade banks to offer its remittance service, Xoom said Tuesday that it had hired Gene Gutierrez, as its senior vice president of business development. He was vice president and director of new product development for Wells Fargo's global remittance services division.

Mr. Gutierrez said in an interview that he was so impressed with Xoom's remittance capabilities that he approached the company and asked for a job.

"I saw a platform that could be easily scalable for banks of all sizes," he said. "The next era for banks will be to add remittance to their core products."

Before introducing the white-label service, Xoom developed an online remittance service directly to consumers through its Web site.

The service, Xoom WebAgent, will appeal to banks with customers from multiple countries, said Mr. Gutierrez, who has been on the job for a few weeks. "A bank that is aware of where they are in terms of their ethnographic customer segments are the ones that immediately understand that there's a value to what we're offering to them."

Xoom will face some stiff competition, both from the established remittance companies, such as First Data Corp.'s Western Union Financial Services Inc. and MoneyGram International Inc., and from other companies that offer white-label services.

PayQuik Inc. of Bala Cynwyd, Pa., Sendit Resources of Paramus, N.J., and Banco Bilbao Vizcaya Argentaria SA's Bancomer Transfer Services are among the companies that offer remittance services that companies can brand.

James Joaquin, Xoom's president and chief executive, said that regional and community banks are interested in money transfers "as a way to acquire and retain a foreign-born immigrant customer, which is probably the biggest area left for retail banking."

Xoom has been testing its service with Meta Financial Group Inc.'s MetaBank since last quarter. The service is currently available at six of the Storm Lake, Iowa, bank's 18 branches.

MetaBank's Meta Payment Systems began offering the service Monday to its small-bank customers, and Xoom said it would begin offering the service directly to other banks.

Xoom's bank customers will market the service, but Xoom will be responsible for actually delivering the funds to the recipient abroad.

Mick Conlin, the vice president of sales and client support for Meta Payment, said, "We always want our own retail bank branches to be a model for the other banks. We certainly want to make sure that if we're selling something to community banks, it's something that we use ourselves."

Meta Payment provides, among other things, prepaid cards to banks. Mr. Conlin said that Xoom initially asked Meta to develop a card product for the remittance company. In the course of those discussions, the executives learned that foreign consumers commonly come to the bank, cash their check, and "go across the street" to initiate remittances.

Using Xoom's remittance services could help people complete all their transactions at the bank, he said. Xoom, which was founded in 2001, has a strong pedigree in the online transfer business. Mr. Joaquin said one of its investors, Sequoia Capital, funded PayPal Inc., which now dominates the person-to-person online money transfer market.

Several veterans of PayPal (now a unit of eBay Inc.) have invested in Xoom and are offering it advisory services. One of Xoom's founders was also an early PayPal investor, and one of Xoom's backers, Peter Thiel, is a founder and a former CEO of PayPal.

"We certainly have some PayPal DNA in the company," Mr. Joaquin said. "We've tried to leverage a lot of their knowledge."

People can use PayPal to send money to friends and family members in other countries, but Mr. Joaquin said PayPal's service does not attract the same customers as remittance companies because both the sender and receiver must have e-mail accounts, and turning the balance in a PayPal account into cash is not as easy as receiving a remittance.

The privately held Xoom can send funds to only 20 countries, though it will be adding 14 more in the near future. Mr. Joaquin said Xoom has a large pipeline of partners in more than 45 additional countries that are being added to its network of receivers.

One of Xoom's ambitions is to expand its distribution system by working with independent operators that offer remittances only to a single country. Mr. Joaquin is hoping to "knit them all together" so these operators can send funds to other countries.

Such a setup would appeal to transfer companies in areas with people from several countries, he said. "We're giving them an efficient way to grow their network and compete with the big guys."

Still, Xoom has a ways to go to catch up to the giants of the remittance industry: Western Union can send money to about 200 countries, and MoneyGram reaches more than 170.

Xoom is sending funds to some of the busiest remittance destinations, including Mexico, the Philippines, and India, Mr. Joaquin said. The transfer industry is so fragmented, and the opportunity so large, that there is plenty of space for an upstart to compete against the big boys, he said.

According to a study the Boston consulting company Aite Group LLC released last year, remittance companies sent more than $230 billion from one country to another. Western Union has a market share of about 13%, and MoneyGram had a 3% share.

Mr. Joaquin said he sees Xoom as a "threat" to Western Union and MoneyGram, despite their overwhelming size. "The threat is financial institutions offering remittance linked to a suite of financial services products."

Banks are looking to gain immigrant customers, he said, and "the sweet spot" for those consumers is remittances.

Gwenn Bezard, a research director for Aite, said banks are interested primarily in attracting checking account customers and persuading them to open credit card accounts and take out mortgages.

"Banks are not particularly in the business of competing head to head with Western Union and MoneyGram," Mr. Bezard said, and many "don't really care about money transfers."

However, he also said banks could use remittance services to attract customers, especially in underbanked immigrant communities. The Xoom service will appeal to banks, because they can offer remittances under their own brand without having to build the underlying infrastructure, he said.

Tim Sloane, the director for debit advisory service at Mercator Advisory Group Inc. of Waltham, Mass., said finding the right price point for the service will be tricky, because it has be low enough to be competitive but high enough to support both Xoom and its customers.

"The margins are going to have to be much thinner for Xoom and the banks that use Xoom than the larger banks, because the money has to fund not just the bank representing Xoom, but also support Xoom's infrastructure," he said. "You have two companies that have to make a living off the margin."

Western Union and MoneyGram said they were not concerned about the threat posed by Xoom.

Cathy Rebuffoni, a MoneyGram spokeswoman, said several major U.S. banking companies, including U.S. Bancorp, and UnionBanCal Corp. (which is majority owned by Mitsubishi UFJ Financial Group Inc.), offer remittances using the MoneyGram brand.

Sherry Johnson, a spokeswoman for Western Union, wrote in an e-mail that the Denver company welcomed the competition. It has long offered a white-label service to banks and post offices abroad, but most now offer remittances under the Western Union brand. "These agents have actually recognized the value of Western Union's brand recognition," she wrote.