Remittances: Over the sea and far away STANDING JUST INSIDE the entrance to Wells Fargo's head office in San Francisco is a magnificent antique stagecoach complete with a strongbox and a seat next to the driver for the "shotgun messengers" who worked for the bank. It is a reminder that in the not-too-distant past one of the main jobs of banks was to lock money in boxes and move it around the world under guard. For companies, these days, big global banks provide a virtual version of this, with networks that let them sweep up cash from far-flung outposts every day. For the biggest firms and banks, the money never stops flowing. It follows the rising sun, financing trade and payrolls, and then moves on as night falls to do the same again in another part of the globe. For consumers who want to "wire" money to some far corner of the world, less has changed since the days of the Old West. If you try to send a small amount of money from America to the Philippines, say, or Mexico, you will probably have to queue at a neighbourhood money-transfer agent and pay a fee that could easily reach 10% of the value of the remittance. The World Bank reckons that cross-border remittances added up to $483 billion last year. These are mainly small amounts sent regularly by migrants to their families back home. As the number of migrants has swelled, so too have the remittances: by about 8% annually in recent years, says the bank. Surprisingly, most big banks have shown little interest in helping these flows along. The Organisation for Economic Co-operation and Development reckons that banks handle just 5-10% of remittances between America and Latin America, one of the world's biggest payment corridors . Although the margins are fat, banks largely avoid this business because the existing interbank transfer systems were built to move money in big lumps rather than by the spoonful. So most banks have offered small-scale cross-border transfers as an afterthought and made them so expensive and inconvenient that they are rarely used. Most take days to process, and if a payment goes awry the customer gets little help. A charge of $25 or more to send money to another country is common, and banks often load on extra fees of 2-3% when they switch currencies. Many banks charge not only for sending money but also for accepting it. A World Bank study in 2009 found that banks charged an average of 12% for small remittances, whereas money-transfer agents such as Western Union averaged 9%. Even though they undercut the banks, money-transfer agents earn mouth-watering margins on remittances Western Union is the gorilla of money transfers, handling close to $1 in every $5 that is wired around the world. Last year it sent close to $80 billion, working through almost half a million agents. Its next-largest global competitor is MoneyGram, which transfers about $20 billion a year. UAE Exchange is a bit bigger, but still has a strong regional focus. There is also a plethora of small money-transfer agents that spring up in kiosks and grocery stores in areas with large migrant populations. Even though they undercut the banks, money-transfer agents earn mouth-watering margins on remittances. Western Union's were above 28% in many of its biggest markets last year. Margins are so fat because pricing is far from transparent. Western Union, for instance, sets prices for individual customers depending on where they are and the amount they send. To wire $500 to Mexico from Dallas costs $14. To send the same amount from New York costs $25. The nimble shall profit Given such margins, this market is attracting some interest from new tech firms that think it is ripe for disruption. One of the best-known of these is Xoom, a San Francisco-based internet firm backed by some of the smartest money in Silicon Valley. It charges a flat fee of $5 or $6 per transaction. The reason it is able to keep it so low is that it has moved one leg of the transaction online. Most remittances are deposited in cash and withdrawn as cash, but Xoom has managed to persuade almost all its customers to make their transfers from bank accounts (a few use credit cards, which are more expensive for Xoom). The company is still tiny compared with rivals - last year it handled about $1.7 billion - but it is growing fast. Its service is very convenient. Many customers send money from their bank accounts using their phones while commuting to work. This year Xoom expects to transfer about $3.4 billion. It reckons that even with charges this low it can achieve better operating margins than Western Union. If Xoom can save money by moving one leg of the transaction online, then why not move both legs? John Kunze, the company's chief executive, explains that the recipients are often in countries with undeveloped banking systems and a strong preference for cash. "The rule we have is never ask Mom to change her behaviour," he says. For those who are willing to move onto an entirely electronic platform, transferring money abroad can be a lot cheaper still. CurrencyFair is a peer-to-peer marketplace that started up just over a year ago after one of its founders, Brett Meyers, was charged huge bank fees hidden in the exchange rate when transferring money abroad. After that, he started ringing up friends abroad to see who wanted to swap currencies. The result was an online marketplace that matches people wanting to buy and sell currencies. In the main corridors, such as that between Britain and the euro area, very little money ever crosses borders. Someone wanting to sell sterling and buy euros deposits their pounds with the firm and is matched with people who have deposited euros and want sterling. Whereas most banks charge about 2.5% through the spread between their buying and selling prices for a currency, on CurrencyFair the participants decide on the rate. If a transaction is completed, CurrencyFair charges 0.15% of its value and a small fee to send the money to the recipient's bank account in the new currency. In practice this means that for the moment people would generally need an account in each country, or at least a friend to whom they could send money. CurrencyFair says it is planning to add cash delivery. If matching parties cannot be found, CurrencyFair itself will quote a rate that it obtains from wholesale markets, with a fee of about 0.5% added on. Another option is sending money from one phone to another. M-Via, an American firm, lets people in America top up their phones at 7-Eleven stores or other shops and then send the money to other members. Cash can be withdrawn from ATM machines using cards linked to the accounts, or the money can be spent using a debit card. New online services are emerging for businesses too. The Currency Cloud, a London-based firm, has received $4m in funding from venture capitalists to build an automated foreign-exchange system to help businesses make and receive payments in 140 currencies. Boots on the ground But good ideas on their own are not enough to overcome the many barriers to entry in this business. Perhaps the biggest one is the need for a network for taking in and handing out cash. Western Union, for instance, has kept increasing its share of the market partly because it has raised the number of agents in its network nearly fivefold over the past few years. Branding is also important. Western Union is able to charge more than some of its competitors because its customers are willing to pay a premium for a well-known name with which they feel safe. A third barrier, and one that will probably become higher with time as more transactions move online, is knowledge and risk control. "If you aren't very good at fraud detection in this business, you either end up bankrupt or in jail," says Xoom's Mr Kunze. The fraudsters are reading all the books we are. They are PhDs themselves. Given these barriers, many of the new entrants are likely to look for alliances and partnerships rather than try to disrupt the market alone. This has already started to happen. M-Pesa, the Kenyan firm that allows people to send money to each other over the phone, has teamed up with Western Union to let people in 45 countries send money directly to M-Pesa's users in Kenya. New entrants to this market do not need to take a dominant share of it to make a big difference to the way it operates. In most of the main corridors with plenty of competition, the fees charged by banks and traditional money-transfer agents are falling sharply. One old-school bank that is successfully making the transition to the online world is India's ICICI bank, which between 2008 and 2011 increased its share of the remittances market by well over 50%, making it number four in the global rankings, according to Aite Group, a research firm. Its customers are both tech-savvy and price-conscious, and they quickly took to cheaper internet transfers.