LONDON (Reuters) - Travelex (IPO-TUL.L) unveiled a new UK digital wallet and card scheme on Thursday, an important step by one of the big global players in foreign currency travel money to test out lower margins as existing business models come under threat.
Fuelled by the electronification of the $5 trillion a day global currency market, the World Bank has aimed to reduce the cost of exchanging even small sums physically or electronically to less than 5 percent of the value of transactions.
The original deadline for that move has already been missed, but those fees are falling steadily, presenting difficult choices to those like Travelex, Western Union (WU.N) or Moneygram (MGI.O) who have large retail networks built on higher transaction costs.
They have been investing to deal with the issue and have far deeper pockets than smaller and nimble tech startups like Transferwise, Azimo or MoneyCloud who have made inroads in the sector over the past two years.
The "Supercard" Travelex unveiled on Thursday is the first fruit of a digital development fund Travelex launched last year to focus on the issue. It allows British travellers to register up to five UK credit or debit cards, which they then use to make payments while abroad electronically, or through a plastic Supercard issued by Travelex.
Crucially the only hard fee charged by the company is the 0.25-0.55 percent spreads Visa and Mastercard tend to charge on top of interbank foreign exchange rates. That compares to real costs of spending euros or dollars on most cards starting at an absolute minimum of just over 1 percent, or with Visa and Mastercard closer to 3 percent.
"The world has changed. Customer behaviour is changing, the way they interact with businesses and services of all kinds, not just FX," said the head of Travelex's new digital team, former Google and e-Harmony executive Sean Cornwell.
"We have set up this digital growth fund to significantly invest in digital products and services, which we view as the likely growth engines for business in the medium to long -term so 5-7 year horizon. Over the next few years we are investing tens of millions of pounds."
A number of sector experts Reuters talked to said it was clear that the bigger players were beginning to recognise that they had to change business models which have typically relied on networks of thousands of sales points in airports, post offices and shops.
The margins on transfers already sound small but in the world of remittances, where cash transfers still dominate, at stake for households in many developing economies are differences adding up to millions of dollars in fees annually.
"There is disruption in this market and there are lots of areas here which are getting squeezed," said John Howells, an ex-American Express executive who has worked as a consultant for a number of big retail FX firms. (www.travelmoneyconsulting.com)
"Are these enormous networks - Western Union has almost half a million points internationally, going to be necessary? Some of the developing markets that might be fine. But in the more developed markets, is having this enormous network still going to matter. Probably not."
Anyone can pre-register for Supercard from today, by visiting www.supercard.io.
Editing by Bernard Orr