Why PayPal's Xoom is vital to its digital payments strategy

Around the same time PayPal spun off from eBay Inc. to become its own company last year, it also took on the global money transfer provider Xoom. This acquisition may have been overshadowed by PayPal's bigger news, but it remains key to the company's post-eBay strategy.

Xoom brings PayPal opportunities and products that its customers did not previously enjoy, despite PayPal's dominance in online alternative payments. Much like the acquisitions of Braintree and Paydiant, PayPal had something very specific in mind when bringing Xoom under its umbrella.

"Being a disruptor in the remittance market is a very big opportunity," said Gil Luria, analyst with Los Angeles-based Wedbush Securities. "Xoom has been able to grow a lot faster than Western Union, which is the incumbent in the market, by having a more efficient digital and mobile product and focusing on that in markets where it is really needed."

Xoom is now considered an important piece of the PayPal puzzle, much in the same manner as the Venmo P-to-P service that PayPal obtained as part of its Braintree acquisition, Luria said. "It isn't just the direct usage by customers; it is mostly customer acquisition and adding functionality to all of PayPal's customers."

Last week, PayPal announced that Xoom would move into the Japanese market, enabling immigrants in the U.S. to send funds to loved ones' bank accounts in Japan.

Xoom can open doors for PayPal as the company plots its future in the payments and financial services industries, said Julian King, vice president and chief marketing officer for business development at Xoom.

"PayPal is on a mission to reimagine financial services as more secure and less expensive ... around the world," King said. "Xoom fits very strongly with that mission."

In addition to the obvious benefit of bringing Xoom's 1.3 million-plus users into the PayPal database at the time of the acquisition, PayPal has also enjoyed substantial growth with Xoom as the move into Japan increased the service's "receive markets" to 56, or about 15 more in the year and a half it has been part of PayPal's portfolio.

It all brings the Xoom brand to places like Latin America, Southeast Asia, China, Japan and parts of Europe, Canada and Australia. Even though the money transfer market is full of traditional and startup competitors, Xoom's reach gives PayPal some financial balance if its other lines of business hit some lulls.

"I have very positive feelings about Xoom because, historically, the money transfer business models like Western Union and MoneyGram are alright, but they also are trying to morph into a more digital type version," said Steve Mott, principal of BetterBuyDesign, a Stamford, Conn.-based consulting firm. "But it's not really a fluid, digital point-to-point type of thing like Xoom."

Xoom bypassed the physical money transfer service model and went straight to digital, as have other entrants, Mott said. "It's just a matter of time, just as it is for P-to-P or mobile wallets, before you start seeing younger people saying they aren't going to use the older business models," he added.

PayPal went after Xoom for defensive measures as well, considering Facebook has continued to expand Messenger capabilities for payments (with former PayPal president David Marcus helming that business line) and is seeking money transfer licenses through the European Union.

"Digital venues are looking to take over the world," Mott said. "It will be much easier to get into markets like India and Brazil with digital products."

Six months ago, Western Union revealed it was setting up a digital money transfer service from the U.S. to Cuba through its online and mobile app channels.

"Western Union is a good company and they have some major advancements in digital payments as well, but it doesn't seem to be at the same level as Xoom," Mott said. "Xoom is not just for sending out digital messages, it's also about the ability to provide a service in difficult places."

A strong point for Xoom is that recipients in some markets have the option to obtain cash at a receive location — an option PayPal customers don't have with its other digital money services, such as Venmo. Currently, money transfers between PayPal users simply move funds from account to account.

"That cash-out option could eventually be extended to other PayPal users, even if they are not necessarily attached to the Xoom brand," Wedbush's Luria said. "There is direct opportunity in remittance, but the ability to extend what PayPal does to all of its customers is very important."

PayPal recognizes the potential capabilities that a digital service like Xoom represents, even to the point where PayPal could have a seat at the table of any current faster payments initiatives taking place in the U.S. or other markets — if it wanted to be part of those discussions.

But its focus for Xoom will remain on global remittance and expanding services within that category because it is "a lifeline for many people around the world," said Xoom's King.

"Our services are quite complementary to these faster payments initiatives because we are such strong believers in providing fast and secure ways for people to send and receive money," King said. "We currently offer instant bank deposits in some markets and within an hour in other markets, all while also exploring other facets of global payments around the world."

Xoom, which has been in the global remittance business for 15 years, brings more to the table than just getting money across a border to another bank account, King added. In addition to now allowing transfers from PayPal accounts, the company has expanded cash pickup, bank deposits, bill paying, mobile reloads and even home delivery of funds or deposits into mobile wallets in some markets.