March 12, 2014 12:04 am

Venture capital interest in remittance groups grows

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Residents transfer money using the M-Pesa banking service at a store in Nairobi, Kenya, on Sunday, April 14, 2013. In the six years since Kenya's M-Pesa brought banking-by-phone to Africa, the service has grown from a novelty to a bona fide payment network. Photographer: Trevor Snapp/Bloomberg©Bloomberg

The multibillion-dollar market in migrant remittances is poised for greater competition, with two London tech start-ups securing big investments from leading US venture capitalists.

WorldRemit, a four-year-old business founded by a Somali entrepreneur and a former adviser to the UN, has raised $40m from Silicon Valley group Accel Partners – the largest ‘series A’ funding round for a European financial technology business.

Competitor Azimo, founded in 2012, has closed a $10m funding round led by Greycroft Partners, and was joined by Accion’s Frontier Investments Group, eVentures and others.

These start-ups are tapping into the growing trend of mobile and online banking to try and snatch a slice of the $529bn in remittances that zip around the world each year, according to estimates from the World Bank.

They undercut traditional money transfer services such as Western Union, who command around 15 per cent of the market but pay to operate through a network of brick-and-mortar agents such as newsagents and internet cafés.

WorldRemit founder Ismail Ahmed first realised the opportunity while he was a student in Kent, working as a manual labourer during his summer holidays and sending money back to east Africa.

“I had to travel to east London to send money via an agent,” he said. “It took days to arrive and cost about 10 per cent of my salary.”

By contrast, 90 per cent of WorldRemit payments are received instantly, and users are charged a smaller percentage of the transaction – the fee could be as little as 95 euro cents. Recipients can accept the money as cash, in a bank account, as phone credit or in a mobile wallet such as Kenya’s hugely popular M-Pesa scheme.

Aside from cost and convenience, Azimo and WorldRemit say that sending money online makes it easier to reliably verify the identity of customers in an industry plagued by crime.

Around £1bn a year are laundered through money transfer businesses in the UK, according to recent government estimates. Last year, Barclays closed the accounts of around 250 money transfer companies, around 100 of which had physical storefronts, due to flaws in their security checks.

Azimo helps verify its customers by linking to their Facebook accounts, and also takes some information from Twitter.

The investments are the latest sign of growing interest in London’s financial technology companies, which includes competitors such as TransferWise, backed by PayPal founder Peter Thiel, and soon-to-launch Moni Technologies.

“London has a real advantage in finance,” said Harry Nelis of Accel. The group has already invested in London-based peer-to-peer lender Funding Circle and controversial payday loan company Wonga.

Before starting World Remit, Mr Ahmed worked with the UN remittance programme advising on compliance and money laundering in east Africa. He also has a PhD in economics from the University of London and completed his MBA at London Business School, where he first raised money through the alumni network.

One question such businesses face is whether to achieve scale by selling their technologies to big financial services institutions, or whether to go directly to consumers – which costs more but gives the company greater flexibility and a larger potential market share.

85 per cent of WorldRemit’s transactions come from existing customers, and Mr Ahmed said it takes the company around 4 to 5 months to pay back the cost of acquisition.

WorldRemit sends money to about 100 countries, while Azimo sends to 190. The companies make money from a mix of commission and the difference in foreign exchange between what they can buy in the market and what they offer customers.

WorldRemit processes around 1.3m transactions a year, with an average transaction size of £200 – which puts the total volume of transactions at around £260m. Azimo does not disclose volumes, but said the average amount sent is £420.

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