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.
