Small World Financial Services (SWFS) CEO Nick Day recently sat down with our CEO, Daniel Webber, to discuss SWFS’ recent private equity transaction, the company’s strategy and his growth plans for the future.
Background on Small World Financial Services
- Employs c.680 people across 16 countries
- Annual revenues in excess of £110m ($155m)
- Can send funds from 32 countries to around 188 countries.
- Has around 230,000 physical locations worldwide in 121 countries
- Approx. 10,000 of those are largely sending locations or paying-in locations
- Operates a multi-channel strategy of physical and digital service offerings
- Private equity firm Equistone Partners Europe announced last month it has agreed to buy a majority stake in SWFS
- Read our competitive analysis of the deal here
On Small World Financial Services’ position prior to Equistone – and what will change
The transaction is an exciting step for us in the sense that it starts us on a new accelerated growth path. We have been growing the business rapidly since inception in 2005. This transaction will partly bring some awareness of our scale now, because we’re not that well known, particularly with a buy and build strategy in our early years, which created a number of sub-brands that are now fully rebranded under one brand.
We are well positioned to continue our growth path, and extend our multi-channel service proposition in new territories, which will be a combination of pursuing bolt-on acquisitions where they make sense, but largely continuing to expand and roll out our network. That’s both a physical network, on the sending side, and expanding our digital footprint.
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On Small World Financial Services’ key differentiators
We compete across the consumer originated cross-border payments spectrum. That includes remittances, bill payments and what we call investment payments. The product advantage that we’ve built up over many years is our direct-to-account capability. Whereas a pure remittance operator might be focused on building cash payout capability – and that’s important in some receive markets – we’ve focused on integrating with bank partners worldwide.
We’ve been building local payments rails for a decade. They are long and slow and sometimes difficult to build, but they give us a real advantage relative to a more cash-focused operator, and, relative to perhaps a new, pure play digital operator, in that we have this large, global payments rails network. We think that’s a sweet spot for growth, both driving our digital business, because we have a high proportion of customers who send money digitally who are looking to put money into a bank account, and in the sense that there is a market shift towards more account penetration on the receive side of the transaction in the developing world.
There are countries where account penetration is still very low, and the direction of travel is greater financial inclusion. Be it that an account covers traditional bank account as well as, in some countries, kind of agency banking where banks try to reach rural populations with a lighter network structure. Also, mobile money accounts, which are of course partnerships between banks and mobile operators.
On the importance of a multi-channel strategy
The starting point is, this is a service business. The customer has a number of providers they could go to. Our proposition is competitively priced and multi-channel so it’s convenient and good value for the customer, and customers essentially self-select to a service mode that is convenient for them.
If we go back many years, phone-based transactions were very common, it was either phone or physical branches in cities. We’ve had the emergence of the agents model, agents in many territories making it convenient for anyone to make a transaction. We’ve had the emergence of web-based, mobile-based placing of transactions.
For SWFS, it’s about offering our customers a broad choice so that they can choose the model that is most convenient for them. And, of course, operating in the 32 countries that we do, there are all sorts of variations in local regulation and in local payment methods that make certain channels more attractive or less attractive to customers.
On the importance of banking relationships as a differentiator
It is a critical component of the business that we have built up. If you are a new entrant to the cross-border payments space, it’s one of the biggest hurdles to overcome. You need the right partners on the receive side to disperse the transaction, those are typically banks or mobile operators or post offices. Those are the largest players.
We have spent a long time building up that global network and the aggregation of all those relationships form the background of our global service. We’ve been doing it at a time when many, particularly the banks, have been retreating from the cross-border world, reducing the number of direct relationships they have. That’s one of the drivers of growth for the nonbank players.
As payments companies, we need bank partners in the sending markets to help us collect the funds from customers, be that customers who want to pay in cash, want to pay with a card, or want to pay with a faster payment, or account transfer, or some other payment method, which there is a proliferation of them around the world.
Again, it’s about making that payment process fast, convenient and compliant. We are one of a relatively small number of independent operators with a business operating at scale across a number of continents and with Grade A banking partners. That comes from our history, it comes from the strength of our platform and the strength of our compliance and regulatory setup.
On the key challenges facing both SWFS and the general payments Industry
One of the biggest challenges is keeping up with evolving consumer behaviour. Be that adoption of new payment methods or the ways that the receiver wants to collect the money. There have been more entrants into the payments industry in the last three years than there have been in the last 30.
There is just an enormous amount of innovation most of which by definition is likely to fail, but clearly there will be winners and there will be changes, and I think for any company like ours or our competitors, dealing with consumers who are faced with such choice, keeping up with that evolving landscape is going to be critical to our future success.
That comes to Small World’s strategy in the sense that we’ve really focused on building a very diversified platform, diverse in terms of the markets and corridors we serve, diversified in terms of the channels and the routes to market so customers can choose to send and pay in a range of options that’s convenient for them, and they can pay out in a range of ways as well. We are trying to build that platform that gives the customer the choice, and of course there will be shifts between different categories, but we will be there to serve the customer however they wish.
On how technology can solve those challenges
Technology is an interesting area. There are a lot of articles and a lot of talk about how a range of new technologies are “disruptors” such as everything’s going to be mobile to mobile or card-to-card or the blockchain. The established, successful cross-border payments companies all have their proprietary technology, they have their platform that allows them to move value from one jurisdiction to another at virtually zero cost.
I think a lot of the improvements that comes from new technology will be incremental in certain processes or certain currency pairs. The area I am most excited about, for example is the reg tech (regulation technology) area. Technologies that can automate or make more efficient critical processes are clearly attractive for the businesses to engage in. The benefits of those technologies will accrue to the companies and to their customers in the sense of more efficient services.
There will also be benefits around the treasury side and the working capital side. Fundamentally, cross-border payments companies are big treasury operations. We move lots of money between certain places, and the return on the capital employed to do that is an important part of the financial performance of the business. So I think there will be particular blockchain offerings or other technology offerings that help with that process.
On managing treasury operations
Any cross-border payments provider provider has a set of treasury options available to it that are quite closely correlated to its banking relationships and to the capability that its banks can offer it. Most cross-border payments companies have indirect access to payment systems. Having a large network of liquidity partners to make that process more efficient is important too. Then there’s the regulatory aspect.
Of course, here in the UK we have open banking and we have the ability now for non-bank payments services providers to access payments directly and kind of cut out the banks. And, of course, we have blockchain solutions coming through with trying to solve specific problems. I think incrementally things will help make the whole process more efficient.
On the potential of the blockchain
I think there’s a lot of hype and the successful, practical implementations will be quite specific and reasonably limited, but positive. I think every company is looking at, studying, doing some pilots to see how they can make it work do their advantage.
I think it will be adopted first for the perceived liquidity on certain currency legs and that’s certainly what we are seeing. There’s a lot of activity there. Inevitably there are a lot of use cases popping up and raising money to try and solve a problem that doesn’t exist. There’s plenty of that, but in all the noise there’s going to be some positives and some winners.
On expansion and where to go next
The growth conundrum is that trade off between margin – there are cosmetically attractive markets that are big but with low margin, that are easy to penetrate and have ease of access. Part of the reason they are low margin is that it is easy to get in – the other piece is complexity. We are all managing complexity, multiple countries, multiple regulations and the players in the sector have taken quite different approaches.
Some have gone very deep into a corridor, or a couple of corridors. And we have gone very broad into, effectively a global proposition. For SWFS, the opportunity is huge both in terms of the market we are already in on the sending side, where our presence is currently relatively modest in the context of the overall industry and in terms of new markets.
On SWFS in five years
We are focused on continued growth through pursuing long-term customer relationships that are sustainable and profitable. That means there will be segments that we shy away from and segments that we go for. This is a service business and this is really about capability and making sure we deliver it consistently day in and day out.