Cross-border payments are a hot industry. It is also highly competitive and saddled with serious regulatory requirements. Succeeding in this space requires strong operational tactics, the ability to adapt to changing markets, and a thorough understanding of the myriad of regulations. Payoneer, a company funded and managed by Yuval Tal, has been developing prepaid debit card solutions for niche cross-border payment markets for more than six years. According to Tal, “offering international payments, especially under $10,000, in a cost-effective way is very complicated and complicated.” While companies like PayPal and Moneybookers have significant cross-border capabilities, Payoneer has demonstrated technologies that make it easier for a much broader group of users to receive international payments.
During its six-year operating history, the company has transformed in many ways to meet changing market demands. Payoneer implemented a strong differentiation strategy by using prepaid debit cards to facilitate the movement of funds across national borders. Further differentiation was achieved by targeting niche industries that struggle with these types of payments. And while there is competition, Tal suggests that “the real challenges are not competition, but things like fighting fraud and mitigating other risks.”
Prepaid debit cards are everywhere. A survey published by the Federal Reserve Bank of Boston in 2009 reported that approximately thirty-three percent of all consumers owned some type of prepaid debit card. Prepaid debit cards include a diverse group of payment instruments ranging from gift cards to phone cards, electronic benefits transfer (EBT) cards, and more. A large number of these ubiquitous instruments are those issued through the major credit card brands: Visa®, MasterCard®, American Express® and Discover®. The use of these branded cards has grown rapidly and, due to recent legislation, they are about to grow even more and at a faster rate.
According to Mercator Advisory Group, consumers loaded more than $60 billion on brand name prepaid debit cards in 2008, nearly 50% more than last year. These cards, while bearing the aforementioned branding, are actually issued by hundreds of banks and their independent third-party partners. Payoneer is one of these third-party companies.
Yuval Tal took advantage of the growing trend towards globalized outsourcing in the IT industry. In particular, he saw many companies outsourcing small jobs to freelancers and micro-enterprises. Mr. Tal also noted that these freelancers found it difficult to get paid. Check mailing, for example, took a long time, and even longer to clear. Cash was out of the question, and wire transfers were prohibitively expensive. Tal developed a system to serve this market and “payment processing” was born. Workers could now be paid quickly and in their local currency through ATMs. Freelance staffing companies like oDesk, Elance, and guru now use Payoneer prepaid cards to pay their workers around the world.
Payoneer harnessed the power of card brand networks and developed an online system that issued prepaid debit cards to these workers that they use to get paid. The self-employed could use their cards to buy products from millions of merchants or withdraw cash in their own currency from thousands of ATMs. Best of all, employers of the self-employed can top up the cards online. Ease of use, online availability and many proprietary features have enabled Payoneer to offer a better service than its rivals. “International payments are not for the faint of heart,” Tal says, “they require institutional funding and ongoing effort to manage many moving parts.”
With a fairly sophisticated payments platform already built, Payoneer was ready to tackle other industries. Like skittles, Payoneer began to take down similar markets. He created programs to compensate participants of large online affiliate programs. The system has also been adapted to compensate affiliate marketers, clinical trial patients, direct sellers, and specialty payroll providers. With each vertical, Tal was careful to incorporate highly proprietary features to increase defense against competitors.
New US government regulations present challenges for prepaid debit card issuers. The recently enacted Dodd-Frank Financial Reform Act slashes the debit card fees that issuing banks can charge merchants. This law will mean significant fee reductions, resulting in a significant loss of revenue for many debit card issuers. Fortunately, the law had some exemptions, including excluding prepaid debit cards from the mandate. In other words, banks can continue to charge the higher “old” rates for prepaid card transactions. Therefore, banks and their third-party issuers are scrambling to develop new prepaid debit card programs to offset lost revenue. This will mean industry growth as well as higher completion. In times like this, Payoneer’s application of defensible differentiation can be your key asset.