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In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Long Ideas

What Is Xoom, and Why Does PayPal Want It?

A lot of people were stunned and confused earlier this month when PayPal Holdings (NASDAQ: PYPLV) purchased an obscure company called Xoom (NASDAQ: XOOM) on the verge of independence. Not surprisingly, many people were wondering what Xoom is and why PayPal wants it so badly.

Basically, Xoom, like PayPal, is a next generation money transfer service. The difference between the two companies is that Xoom allows people to transfer money between the virtual world and the real world. PayPal lets you buy and sell online, in social media with Venmo, and in stores with its credit and debit cards.


How Xoom Works

Xoom lets you transfer cash internationally while bypassing traditional wire transfer services such as Western Union (NYSE: WU) and MoneyGram International (NASDAQ: MGI). A person can use it to send a money transfer to persons in 54 countries around the world from a PayPal or bank account. Nobody has to go to withdraw cash and stand in line at the supermarket to send money to Mom back in the old country.

It also enables people in countries like the United States to send money directly to mobile accounts in developing nations. That can help a Honduran that works here in the United States pay the phone bill for his mother back home directly.

Receiving a money transfer from the U.S. or the UK can be a real hassle for a person in a less developed country. She might have to walk or take the bus miles to reach a store or bank that receives money transfers. Once there, she would have to get the transfer in cash and carry that home.


Carrying cash around in developing countries presents a whole new set of problems, such as crime. The local gangsters or corrupt cops might be standing outside the money transfer office waiting to help themselves to all or a percentage of the recipient’s cash. Thieves might follow the recipient home and steal the cash after he or she goes to work.

There’s also the problem of storing the cash; if it gets stolen, lost or destroyed, it is gone. A large percentage of the world’s population still uses the mattress ,or the coffee can buried in the garden as their “bank.”

Even if the cash does not get lost or stolen, it can still be a hassle; the recipient might have to take a day off from work to travel miles to pay the electric bill in a developing country. By allowing direct electronic transfers, Xoom can eliminate the cash and make the whole process simpler, cheaper, easier and safer.

How Xoom Will Help PayPal Tap the Developing World

Adding Xoom’s technology to its ecosystem would allow PayPal to offer direct money transfers and receive money transfers. That will help penetrate the developing world and even parts of Europe.

For example, it could allow PayPal users to keep doing business in a country like Greece, where the banking system shut down because of the debt crisis. That could help an American company place an order from a Greek supplier that has no access to its bank accounts or a man in Scotland send some cash to his son that is on vacation in Greece. A Greek company could use Xoom to pay for spare parts for machinery from a German company while the banking system is down.

A long-term development will be that Venmo users could send money transfers or send transfers from their mobile phones. As I have noted elsewhere, Venmo could be PayPal’s ace in the hole—both PayPal’s answer to Apple Pay and its entry point into the banking system.

A Vast New Market

Xoom could help PayPal tap a vast market around the world: the unbanked people with no bank accounts or no access to one. Most of these people still use money the old fashioned way—in cash—and they are everywhere, even here in the USA.

Around 7.7% of American households, or 9.6 million families, were “unbanked” in 2013, meaning that they had no bank accounts, according to the U.S. Census Bureau and the Federal Deposit Insurance Corporation (FDIC). Around 20% of U.S. households, or 24.8 million families, were underbanked in 2013, meaning they had limited access to a bank account or used alternative financial services outside of the banking system, such as wire transfers.

The market outside the U.S. is even larger. The World Bank estimates that around 2.5 billion people, nearly half of the global population, lack bank accounts. Beyond that, there are tens of millions of people with limited access to banking; for example, all the people that live in countries like Greece, Venezuela or Argentina, where the banking system is either dysfunctional or severely restricted.

There are, of course, problems to be worked out, chief of which are currencies. What about countries like Argentina, where the money is either worthless or dramatically changes in value on a regular basis? For example, what about Latin American countries where El Presidente is using the printing press to “stimulate” the economy or pay his or her bills?

One potential solution to that problem is crypto currencies like Bitcoin, which PayPal is now accepting. People in Argentina are already using Bitcoin to get around their country’s currency controls, The New York Times reported in May.

In a U.S. Securities and Exchange Commission (SEC) filing from April, PayPal Holdings noted: “A merchant can also integrate with Braintree to begin accepting payments with credit or debit cards, PayPal, Venmo, digital currencies such as Bitcoin, or other payment solutions with a single integration.”

Braintree is PayPal’s commercial payment solution subsidiary that helps merchants integrate with the platform. It functions as a sort of think tank coming up with new payment solutions.

A Massive Financial Revolution

This means we could be on the verge of a massive financial revolution. For the first time in human history, almost every adult on the planet could have access to the banking system through digital wallets such as PayPal.


History shows us that vast transformations occur when access to the financial system widens. The current consumer culture in the United States, Europe and Canada arose because credit cards greatly increased the buying power of average people. The Industrial Revolution occurred because new advances in banking gave capitalists access to large amounts of credit.

PayPal is the one company that could be on the cutting edge of this revolution. It could be to finance what Google (NASDAQ: GOOG) is to information. Just as Google greatly increased access to information and made vast amounts of money in the process, PayPal will greatly increase access to money and credit and generate large profits in the process.

PayPal could be the best value investment around today because it could become the world’s top payment solutions provider for the 21st century. Its expertise in digital wallets could provide the basis for a next generation payment solution platform that combines peer to peer lending, money transfer, mobile payment and more as well as generating vast amounts of cash and float. If I could buy one financial stock right now, it would be PayPal.

Disclosure: your friendly neighborhood blogger owns shares of PayPal.