Cross-border payments is a hot industry. It is also highly competitive and encumbered with serious regulatory requirements. Succeeding in this space requires sound operating tactics, the ability to adapt to changing markets and a deep understanding of myriad regulations. Payoneer, a company funded and managed by Yuval Tal, has been developing prepaid debit card solutions for niche cross-border payments markets for over six years. According to Tal, “Providing international payments, especially under $10K, in a cost effective manner is very tricky and complicated.” While companies like PayPal and Moneybookers have meaningful cross-border capabilities, Payoneer has demonstrated technologies that make it easy for a much broader group of users to receive international payments.
During its six year operating history, the company has morphed in many ways to meet changing market demands. Payoneer implemented a solid differentiation strategy by using prepaid debit cards to facilitate the movement of funds across national borders. Further differentiation was accomplished by targeting niche industries struggling with these types of payments. And although there is competition, Tal suggests that, “the real challenges are not competitive, but are things like combating 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 possessed some type of prepaid debit card. Prepaid debit cards include a diverse group of payment instruments ranging from gift cards to phone cards to electronic benefits transfer (EBT) card, etc. A very large number of these ubiquitous instruments are those issued through the major credit card brands: Visa®, MasterCard®, American Express® and Discover®. Use of these branded cards has been growing quickly, and because of recent legislation, they are poised to grow further and at a greater rate.
According to the Mercator Advisory Group, consumers loaded over $60 billion dollars onto branded prepaid debit cards in 2008, almost a 50% increase over the past year. These cards, although carrying the aforementioned brands, are actually issued by hundreds of banks and their independent third party partners. Payoneer is one of these third party companies.
Yuval Tal capitalized on the increasing trend towards globalized outsourcing in the IT industry. In particular, he saw that many companies were outsourcing small jobs to freelancers and micro-companies. Mr. Tal also noticed that these freelancers found it difficult to get paid. Sending checks, for instance, took a long time — and an even longer time to clear. Cash was out of the question, and wire transfers were prohibitively expensive. Tal developed a system to cater to this marketplace and “payout processing” was born. Workers could now be paid quickly, and get paid in their local currency through ATMs. Freelance staffing companies like oDesk, Elance and guru now use Payoneer pre-paid cards to pay their workers worldwide.
Payoneer capitalized on the power of the card brands’ networks and developed an online system that issued prepaid debit cards to these workers which they use to receive their pay. Freelancers could then use their cards to buy goods from millions of merchants or withdraw hard cash in their own currency from thousands of ATMs. Best of all, the cards could be reloaded online by the freelancers’ employers. The ease-of-use, online availability and many proprietary features allowed Payoneer to offer a better service than its rivals. “International payments are not for the faint of heart,” says Tal, “it requires institutional funding and an ongoing effort to manage a lot of moving parts.”
With a fairly sophisticated payments platform already built, Payoneer was poised to tackle some other industries. Like bowling pins, Payoneer began knocking down similar markets. It created programs to compensate participants of large online affiliate programs. The system was also adapted to compensate affiliate marketers, clinical trial patients, direct sellers and specialized payroll providers. With each vertical, Tal was careful to build-in highly proprietary features to increase defensibility with respect to competitors.
New U.S. government regulations pose challenges to prepaid debit card issuers. The recently enacted Dodd-Frank Financial Reform Law sharply lowers the debit card fees issuing banks can charge merchants. This law will mean serious fee reductions, resulting in a significant loss of revenue for many debit card issuers. Fortunately the law did have some exemptions, including the exclusion of prepaid debit cards from the mandate. In other words, banks can continue to charge the “old” higher rates for transaction on prepaid cards. So, banks and their third party issuers are scrambling to develop new prepaid debit card programs to make up for lost revenues. This will mean industry growth as well as greater completion. It’s times like this where Payoneer’s application of defensible differentiation may be its key assets.