Yesterday, PayPal announced that it would buy the international remittance provider Xoom for $890 million. At an offer price of $25 per share, as Reuters notes, this represents a premium of 21% from Wednesday’s closing price of $20.70. Xoom, for those unaware, is an international remittance provider that has set itself the goal of disrupting the likes of Western Union and MoneyGram with a digital-first strategy. There are two key elements to this strategy. First, by doing away with maintaining an expensive network of agent locations that can accept remittance transfer requests in cash, it can offer lower prices than those offered by the established incumbents in this market space. Second, Xoom promises vastly faster transfers—bank deposits within an hour for transfers to the Philippines, for instance, through its “Bank-to-Bank ULTRA service.” It can do this thanks to its proprietary antifraud risk management algorithm, which analyzes transactions for possible red flags, separating those that need further review and speedily moving along others.
The first of these two strategic advantages has mostly withered away. Western Union has invested significantly in the development of its online and mobile channels and has cut prices to compete aggressively while maintaining its leadership in higher-margin cash-funded remittance transfers. Xoom, despite growing revenues and user numbers, has seen a negative operating margin for four of the last five years. Compared to Western Union’s healthy 20.34% operating margin in 2014, Xoom recorded negative 15.70% in 2014. One can see why Xoom’s shareholders are happy that PayPal has come calling.
Near-term financial health concerns aside, Xoom still has significant value to offer in PayPal’s quest to become the global leader in payments under its new CEO Dan Schulman. Already, over half of PayPal’s transaction volume comes from outside the United States. Nevertheless, the company has failed to establish its brand in fast-growing e-commerce markets like China and India. Chinese and Indian shoppers are more likely to use homegrown digital wallets like Alipay and Paytm (in which Alibaba recently acquired a substantial stake), respectively, while shopping online. India, especially, is a huge opportunity. As Mary Meeker of KPCB, has pointed out in her excellent annual survey of Internet Trends for 2014, India is the third largest Internet population and adds more Internet users each year than any other country (64 million in 2014). India, incidentally, is also the largest recipient of international remittances globally, receiving $70 billion in 2013.
Putting these data points together suggests a possible endgame for PayPal’s acquisition of Xoom. If it can convince remitters to fund PayPal wallets for their intended beneficiaries back home in return for more competitive transfer rates, it would suddenly have acquired a user base of many millions with potentially billions of dollars in spending power. Partnerships with local e-commerce giants like Flipkart in India would then allow PayPal to do in emerging markets what it did with eBay in the U.S. in the mid-nineties—become the indispensable medium of internet commerce.
