The Motley Fool

Why OFX Group Ltd is facing big competition from TransferWise

Ever since international money transfer business OFX Group Ltd (ASX: OFX) came to market at an initial public offer valuation of $2 per share in late 2013 it has struggled to deliver on investors’ expectations.

Today the shares change hands for $1.67 and the decision of its private equity owners in Accel Partners and Carlyle Group to dump their entire holdings in the business is looking increasingly smart. Early backer Macquarie Group Ltd (ASX: MQG) also sold all its holdings, with the group’s founders also largely heading for the exits.

One of the main problems OFX Group has faced since 2013 is rising competition. This after it enjoyed a rather benign competitive environment for more than 10 years spent attacking the banks’ market share prior to its IPO in Australia.

Not only is the competition now fighting for OFX’s market share, but it’s also hurting the critical profit margins as customers demand tighter transaction spreads in the knowledge that they have more than one international money transfer business to choose from.  The spread (from which the profit is derived) is the difference between the rate offered to a customer and the real spot or mid-market rate.

Moreover, OFX Group is now facing a disruptive competitor in TransferWise that charges customers no FX spreads at all.

TransferWise does charge a fee (say $10 or $20) for its services per transaction (as is standard with the likes of OFX or other discount money transfer businesses) and it is now reportedly posting an operating profit due to its lower cost base.

TransferWise can offer spot currency exchange rates to different counterparties as the currencies are never exchanged across digital banking borders.

Rather a buyer of AUD for example in the U.S. is matched with a seller of AUD in Australia, with both parties then instructed to transfer the matched sums to local TransferWise accounts. TransferWise’s AUD and USD domiciled accounts then send the equivalent amounts to the recipients’ nominated accounts with no actual FX taking place.

In effect TransferWise claims it is disrupting the international money transfer business just as Skype disrupted voice calling and it is now gaining a network effect and regulatory approvals from the likes of ASIC, and U.S. or U.K. regulators.

Media reports in May 2016 claimed TransferWise was valued at around $1.5 billion, with that value likely to be significantly higher today. By comparison, OFX Group’s value is around $384 million today. Notably, OFX was founded in 1989, TransferWise in 2011 – around two years later OFX went to IPO as the insiders sold out.

OFX Group may go on to perform well as a business given the size of international money markets, but it’s now up against a potentially lower cost and more popular business model.

NEW! Dividend expert names his top ASX income stock for 2017-18

You probably don’t know this market leader, but it’s making waves in Asia and already boasts a term-deposit-crushing dividend of almost 5%. A debt free balance sheet and dominant market position at home and abroad mean this company offers investors income and some real-deal growth potential.

Simply click here to discover the name, code and a full investment analysis in our brand-new FREE report, "The Motley Fool’s Top Dividend Stock for 2017-18."

FREE REPORT: Five Cheap and Good Stocks to Buy now…

Our Motley Fool experts have FREE report, detailing 5 dirt cheap shares that you can buy today.

One stock is an Australian internet darling with a rock solid reputation and an exciting new business line that promises years (or even decades) of growth… while trading at an ultra-low price…

Another is a diversified conglomerate trading near a 52-week low all while offering a 2.7% fully franked yield…

Plus 3 more cheap bets that could position you to profit over the next 12 months!

See for yourself now. Simply click the link below to scoop up your FREE copy and discover all 5 shares. But you will want to hurry – this free report is available for a brief time only.

CLICK HERE FOR YOUR FREE REPORT!