Online payments company Paypal, just a few weeks away from being spun off from online retail giant eBay, entered the expanding digital money transfer industry through its reported acquisition of Xoom, a big name among the companies that provide the service.
Paypal will be spending $25 per share to purchase the publicly traded Xoom, which is equivalent to about $1.09 billion in cash. Excluding the cash and short-term investments and including the debt of the money transfer company, Paypal will be paying around $890 million to acquire Xoom.
Xoom is among several upstart companies that are looking to challenge traditional money transfer companies, such as Western Union, in the money remittance business. This year, the lucrative industry is valued at around $600 billion by the World Bank.
The service is mostly used by immigrants and overseas workers who send money to family members still living in their home countries. Traditional remittance service companies are usually cash-based and depend on agents situated in retail locations to complete the global money transfers.
Digital remittance companies such as Xoom, however, make money transfers more convenient by allowing customers to send cash to other countries through their computers and mobile phones. Currently, Xoom only allows people in the United States to send out money to recipients located in over 37 countries.
"International remittances is an industry that is ripe for disruption," said Paypal president Dan Schulman, who will become the CEO of the company once the spinoff from eBay is done.
Reports revealed that the splitting off from eBay of Paypal will be completed within the month, with the two companies to trade independently as public companies on July 20.
Through a phone interview with The New York Times, Xoom CEO John Kunze said that the global presence of Paypal was a huge factor for the deal, as the online payment company's technical knowledge and connections with banks and regulators in different countries will allow for the expansion of Xoom.
The biggest locations where money is sent with Xoom's services are India, the Philippines and Latin America. Kunze added that around 60 percent of the company's customers send their money through mobile phones.
Paypal has become a household name as an online payments service through its association with eBay, as the preferred method for transactions on the website. However, due to the progress of payment startups such as Square and Stripe, Paypal has looked for new areas where it can expand its business.
This search for new growth was a factor in Paypal's separation from eBay, as analysts have said that the ownership of eBay on the company has prevented other big names in the online retail industry from forging deeper partnerships with Paypal.
