Iñigo Rumayor is the co-founder of Regalii, a FinTech startup that lets people send money overseas.
When we started our FinTech startup Regalii, over 3 years ago, I thought that we knew everything there was to know about remittances, FinTech and its customers. As a Mexican native living around the world, I had received and sent remittances for years. In Mexico, remittances are a part of our daily lives, as much as mariachis and our delicious tacos.
As it turns out, most of what I thought I knew turned out to be wrong. 5 of the biggest surprises are below:
1. Online fraud can kill you
Fraud is one of the biggest headaches for any e-commerce company, but for remittance and payment companies it can be a nightmare. When we started Regalii, I remember one investor saying, “One month of fraud can kill your company.” I laughed it off. We quickly learned how right he was.
Fraudsters are attracted to remittance and payments companies because the product is cash. A fraudulent credit card transaction gets a fraudster $US500 USD vs, say, 10 bags of dog food at other e-commerce companies. Because of this reality, fraudsters work 40 hours+ a week trying to break the system; this is the way they make their living.
Automated Clearing House (ACH) transactions, which are an electronic way of processing payments, make this piece of the puzzle even harder to solve.
Online remittances are mainly processed by ACH because it only costs around $US0.20 per transaction, but it takes on average 2 to 3 days to clear. Therefore, when you send money and they say it arrives in minutes, the company has sent money to the recipient before actually receiving the money themselves.
This is a huge liability. Remittance companies spend millions of dollars on fraud detection software in an attempt to filter fraudulent customers from real ones. There is an innate trade-off between giving customers the best experience and fraud protection. If you reject every suspicious transaction, you will end up rejecting a lot of real customers trying to use your service. It is extremely hard to find a balance.
With credit card fraud, companies usually do not even know they have been fooled out of money until months after the transaction has taken place. Stolen credit card numbers are routinely sold overseas, where people use them to try and extract money from remittance companies. If they are successful, the owner of the credit card sees the charges on their credit card and files a charge back.
When a chargeback happens, usually the whole process takes about 3 months to go full circle. After this time, the fraudster will have their money, the credit card owner will have been refunded, and you will have had the money taken away from your credit card processor.
2. Compliance is a bitch
Fintech startups in the United States need to comply not only with federal regulations but also with the states’ unique regulations which differ from each other and federal laws. This means that you need follow 51 different guidelines just to operate in one country. Being registered as a money transmitter is a 2 year ordeal and will set you back about 3 million dollars. Naturally, most startups try to avoid it.
The documentation on what is and what isn’t considered kosher is very hard to locate and all the harder to understand. Many states haven’t updated their rules since the advent of the Internet. The only people who can actually decipher the rules are highly paid lawyers who have personal relationships with each state regulator.
Because of the pain of compliance in the US, many of the best FinTech companies do not start in the US, but rather pick Europe (London specifically) as a home base. Europe overall has much simpler laws governing money transfer and they are consistent across most of the EU.
3. Customer acquisition is expensive!
In order to easily acquire customers, I’ve learned that your product has to be 10 times better than the competition. Well, you can acquire customers other ways, but it’s going to be crazy expensive.
Acquiring customers is a hassle; even if you have a product that is 10X better than the next best product you still need to educate your customers and show them why it is better.
Educating customers in the remittance industry is especially difficult. Remittance senders are sceptical by nature because they are routinely exploited as newcomers to this country. They don’t trust new services; we’ve gotten the response “that is too good to be true” hundreds of times.
Customer acquisition is not only hard, it is expensive. Xoom spends on average $US50 USD to acquire every new customer. It is an iterative process by nature, where you need to do a lot of experiments until your customer acquisition is lower than your customer lifetime value. In layman’s terms, the money you spend in getting a new customer needs to be less than the value of that customer. Your product might be better than the second best alternative, but if you can’t find a way of acquiring customers in scale you are doomed to failure.
Many new startups in the remittance industry offer lower fees than Western Union or other traditional remittance companies, but they haven’t figured out a cost effective way to convince users to give their service a try. It is painful to see customers try your service just to receive their $US50 USD sign up credit and never return, once it’s redeemed.
We gave away so much money acquiring customers, some of our customers just thought we were a charity.
4. Customer trust takes time
When we started Regalii we launched a service with NO fees and quickly realised that customers trusted the service even less. They couldn’t believe that we were giving them a free service. In their minds they saw the service as a scam.
Trust is extremely important for every Fintech startup and especially for remittance companies. Customers trust companies with their hard earned dollars and their families count on those funds for subsistence. Customers are extremely loyal to the companies that keep their promises and provide a transparent service.
One of the reasons that WU and MoneyGram can charge huge fees is because customers trust their brands. Customers are willing to pay a premium for the service to guarantee that the money will get to their home countries. The fact that they can see the physical stores probably helps as well.
5. Remitters are offline
A few months after starting Regalii we realised that even though online remittances were quickly growing, 90% of the remittances still happened offline. After moving our office to Washington Heights, New York (better known as the little Dominican Republic) we were able to take a closer look at who sends money and why they do it, to better understand why customer acquisition and trust is so difficult.
We quickly realised that people sending money were mainly unbanked, which meant they didn’t have a bank account or a credit card to transact online. Secondly, they felt uneasy about online transactions, fearing they would be victims of fraud. Finally, there were agents almost in every corner in the immigrant communities, making it sometimes more convenient and faster than sending money online.
We learned that even though the future of remittances is online, the present is still offline. We came to realise that you can’t overlook 90% of the pie. To enter the remittance market you need to create a dual approach in which you target both the present and start to prepare for the future.
These are some of the main reasons why we think the remittance industry is especially challenging and exciting at the same time. While many of these lessons were painful to learn, they were all things which many young founders have to learn for themselves. The lessons, have lead us to change our focus to business transactions, so that customers can interact with brands they already trust, and release an API, supporting bill payment to more than 10 countries.