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Over the sea and far away

The business of sending money across borders is lucrative, fast-growing and ripe for change STANDING JUST INSIDE the entrance to Wells Fargo’s head office in San Francisco is a magnificent antique stagecoach complete with a strongbox and a seat next to the driver for the “shotgun messengers” who worked for the bank. It is a reminder that in the not-too-distant past one of the main jobs of banks was to lock money in boxes and move it around the world under guard. For companies, these days, big global banks provide a virtual version of this, with networks that let them sweep up cash from far-flung outposts every day. For the biggest firms and banks, the money never stops flowing. It follows the rising sun, financing trade and payrolls, and then moves on as night falls to do the same again in another part of the globe. For consumers who want to “wire” money to some far corner of the world, less has changed since the days of the Old West. If you try to send a small amount of money from America to the Philippines, say, or Mexico, you will probably have to queue at a neighbourhood money-transfer agent and pay a fee that could easily reach 10% of the value of the remittance. The World Bank reckons that cross-border remittances added up to $483 billion last year. These are mainly small amounts sent regularly by migrants to their families back home. As the number of migrants has swelled, so too have the remittances: by about 8% annually in recent years, says the bank. Surprisingly, most big banks have shown little interest in helping these flows along. The Organisation for Economic Co-operation and Development reckons that banks handle just 5-10% of remittances between America and Latin America, one of the world’s biggest payment corridors . Although the margins are fat, banks largely avoid this business because the existing interbank transfer systems were built to move money in big lumps rather than by the spoonful. So most banks have offered small-scale cross-border transfers as an afterthought and made them so expensive and inconvenient that they are rarely used. Most take days to process, and if a payment goes awry the customer gets little help. A charge of $25 or more to send money to another country is common, and banks often load on extra fees of 2-3% when they switch currencies. Many banks charge not only for sending money but also for accepting it. A World Bank study in 2009 found that banks charged an average of 12% for small remittances, whereas money-transfer agents such as Western Union averaged 9%. Western Union is the gorilla of money transfers, handling close to $1 in every $5 that is wired around the world. Last year it sent close to $80 billion, working through almost half a million agents. Its next-largest global competitor is MoneyGram, which transfers about $20 billion a year. UAE Exchange is a bit bigger, but still has a strong regional focus. There is also a plethora of small money-transfer agents that spring up in kiosks and grocery stores in areas with large migrant populations. Even though they undercut the banks, money-transfer agents earn mouth-watering margins on remittances. Western Union’s were above 28% in many of its biggest markets last year. Margins are so fat because pricing is far from transparent. Western Union, for instance, sets prices for individual customers depending on where they are and the amount they send. To wire $500 to Mexico from Dallas costs $14. To send the same amount from New York costs $25. The nimble shall profit Given such margins, this market is attracting some interest from new tech firms that think it is ripe for disruption. One of the best-known of these is Xoom, a San Francisco-based internet firm backed by some of the smartest money in Silicon Valley. It charges a flat fee of $5 or $6 per transaction. The reason it is able to keep it so low is

that it has moved one leg of the transaction online. Most remittances are deposited in cash and withdrawn as cash, but Xoom has managed to persuade almost all its customers to make their transfers from bank accounts (a few use credit cards, which are more expensive for Xoom). The company is still tiny compared with rivals—last year it handled about $1.7 billion—but it is growing fast. Its service is very convenient. Many customers send money from their bank accounts using their phones while commuting to work. This year Xoom expects to transfer about $3.4 billion. It reckons that even with charges this low it can achieve better operating margins than Western Union. If Xoom can save money by moving one leg of the transaction online, then why not move both legs? John Kunze, the company’s chief executive, explains that the recipients are often in countries with undeveloped banking systems and a strong preference for cash. “The rule we have is never ask Mom to change her behaviour,” he says. For those who are willing to move onto an entirely electronic platform, transferring money abroad can be a lot cheaper still. CurrencyFair is a peer-to-peer marketplace that started up just over a year ago after one of its founders, Brett Meyers, was charged huge bank fees hidden in the exchange rate when transferring money abroad. After that, he started ringing up friends abroad to see who wanted to swap currencies. The result was an online marketplace that matches people wanting to buy and sell currencies. In the main corridors, such as that between Britain and the euro area, very little money ever crosses borders. Someone wanting to sell sterling and buy euros deposits their pounds with the firm and is matched with people who have deposited euros and want sterling. Whereas most banks charge about 2.5% through the spread between their buying and selling prices for a currency, on CurrencyFair the participants decide on the rate. If a transaction is completed, CurrencyFair charges 0.15% of its value and a small fee to send the money to the recipient’s bank account in the new currency. In practice this means that for the moment people would generally need an account in each country, or at least a friend to whom they could send money. CurrencyFair says it is planning to add cash delivery. If matching parties cannot be found, CurrencyFair itself will quote a rate that it obtains from wholesale markets, with a fee of about 0.5% added on. Another option is sending money from one phone to another. M-Via, an American firm, lets people in America top up their phones at 7-Eleven stores or other shops and then send the money to other members. Cash can be withdrawn from ATM machines using cards linked to the accounts, or the money can be spent using a debit card. New online services are emerging for businesses too. The Currency Cloud, a London-based firm, has received $4m in funding from venture capitalists to build an automated foreign-exchange system to help businesses make and receive payments in 140 currencies. Boots on the ground But good ideas on their own are not enough to overcome the many barriers to entry in this business. Perhaps the biggest one is the need for a network for taking in and handing out cash. Western Union, for instance, has kept increasing its share of the market partly because it has raised the number of agents in its network nearly fivefold over the past few years. Branding is also important. Western Union is able to charge more than some of its competitors because its customers are willing to pay a premium for a well-known name with which they feel safe. A third barrier, and one that will probably become higher with time as more transactions move online, is knowledge and risk control. “If you aren’t very good at fraud detection in this business, you either end up bankrupt or in jail,” says Xoom’s Mr Kunze. “The fraudsters are reading all the books we are. They are PhDs themselves.” Given these barriers, many of the new entrants are likely to look for alliances and partnerships rather than try to disrupt the market alone. This has already started to happen. M-Pesa, the Kenyan firm that allows people to send money to each other over the phone, has teamed up with Western Union to let people in 45 countries send money directly to M-Pesa’s users in Kenya.

New entrants to this market do not need to take a dominant share of it to make a big difference to the way it operates. In most of the main corridors with plenty of competition, the fees charged by banks and traditional money-transfer agents are falling sharply. One old-school bank that is successfully making the transition to the online world is India’s ICICI bank, which between 2008 and 2011 increased its share of the remittances market by well over 50%, making it number four in the global rankings, according to Aite Group, a research firm. Its customers are both tech-savvy and price-conscious, and they quickly took to cheaper internet transfers.

The salesman of Brazil

Brazil’s richest man is betting on resources and infrastructure. Can he deliver?
FLOGGING insurance door-to-door is not easy. No one likes having lunch interrupted by a stranger who babbles about accidents and death. A salesman must be charming to stop that door from slamming in his face. This was Eike Batista’s baptism of fire. He put himself through college in the 1970s by peddling policies. The skills he learned have come in handy since then. Mr Batista (pictured, sharing a stage with Brazil’s president, Dilma Rousseff) dropped out of his engineering course and left Germany for his native Brazil. He bought gold from wildcat miners in the Amazon, sold it in Rio de Janeiro, and made $6m by the age of 25. He borrowed more— and lost most of it—buying out pick-and-shovel operators and trying to mechanise their mine. Food, fuel and equipment had to be flown in. Workers got sick. Finally, the mine started producing. That taught him to stick to “idiot-proof assets”, he now quips, with such high margins that even big setbacks can be survived. He bought more mines abroad. By 1986 he was chairman of a Canadian goldminer that grew to be worth a tasty $1.7 billion. By 2001, legal troubles in Russia and Greece had slashed that to $1 billion. Mr Batista resigned and returned home to Brazil to sell new dreams. Since 2004 he has set up and listed five companies: MPX (energy generation); MMX (mining); LLX (logistics); OGX (oil and gas) and OSX (shipbuilding). A sixth, one of his few nonBrazilian assets, a Colombian coal mine, will be spun off from MPX on May 25th. Together with four unlisted companies in entertainment, precious metals, information technology and property, these make up the EBX empire. (All those Xs are supposed to represent wealth multiplying.) Few have yet made profits. Some were listed before they were much more than an idea. But selling potential has made Mr Batista Brazil’s richest man and the world’s seventh-richest, with a fortune estimated at $30 billion. That’s more than Mark Zuckerberg of Facebook. Mr Batista says he will not be satisfied until he has taken the top spot from Carlos Slim, a Mexican telecoms tycoon. Batista’s view of Brazil The EBX empire reflects Mr Batista’s understanding of Brazil’s strengths and weaknesses. The country has copious minerals; Mr Batista extracts them. It also has skimpy infrastructure. Not Copacabana bikini skimpy, but far too slight for such a big place: hence the queue of ships idling

off Rio’s beaches, waiting for a slot at its overburdened port. Mr Batista aims to build roads, railways, ports, ships and refineries to shift Brazil’s minerals to the global market. He is also building power plants, to be fuelled by his own gas and coal. It was OGX, Mr Batista’s oil-and-gas firm, that propelled him from rich to super-rich. He founded it in 2007, a few months before Brazil’s state-controlled oil giant, Petrobras, announced the discovery of huge offshore pré-sal (“sub-salt”) oil reserves. Some promising blocks were withdrawn from auction later that year—but guided by old hands from Petrobras, including Paulo Mendonça, its recently retired head of exploration, OGX bid for those still on offer. It won 21, most in shallow water. Since then Brazil has auctioned no more offshore fields, leaving OGX as its largest private oil firm. Its 2008 listing raised $4.3 billion, at the time a record for Brazil. Sitting in his 22nd-floor office at EBX’s headquarters in Rio, looking out at a picture-postcard view of Pão de Açúcar (Sugar Loaf mountain), Mr Batista describes himself as a “truffle-sniffing labrador”. Prospectors typically search in 17,000 places for every gold find, he says: in his goldmining days he got lucky eight times. Perhaps 85% of OGX’s test wells have struck oil. At its Waimea deposit OGX went from discovery to production in just two years, a world record. The first 1.2m barrels were sold to Shell in March. And unlike Petrobras, which is the sole operator in the pré-sal regions, OGX’s production costs are low: in the bottom 20% globally. EBX has assets in nine Brazilian states. But it is at the Port of Açu in Rio state that Mr Batista’s vision of the new Brazil is clearest to see. The original idea was to build an offshore terminal through which to ship iron ore from his Minas-Rio mine. After that was sold in 2008 to Anglo American, the project grew into a joint venture with the global mining giant. Mr Batista started to think bigger. With 70% of Brazil’s GDP in the south and south-east, why not add a container terminal to vie with the region’s pricey, crowded ports? Then came the vast oil finds, and the plans expanded once more, to include an industrial complex, oil-handling facilities and a shipyard. Now LLX is trying to strike a deal with Vale, Brazil’s biggest mining firm, to rebuild a dilapidated railway that passes nearby, and to persuade the government to upgrade local roads. A new city will be built to house workers (“a Venice of the tropics”, Mr Batista likes to call it; to everyone else, it is “Eikelândia”). The first shipments of iron ore are scheduled for 2013, and both terminals should be ready by the end of that year. By 2015, if all goes to plan, Açu will be the world’s third-largest port complex, moving 350m tonnes of cargo a year. Buy local, buy dear Brazil’s government insists that oil-and-gas operators buy most of the equipment they need from overpriced domestic manufacturers. This is a heavy burden on Petrobras, which needs sophisticated kit to drill miles beneath the ocean floor, and a big reason why the company’s share price has languished in recent years. But the rule is needed, says Mr Batista, to promote industrial development. “You think Brazil can lose this chance and not build a ship industry?” he asks. Even if it pushes up OGX’s costs by 50%, he says, his oilfields will still make money.

Meanwhile, other parts of his empire are taking advantage of local-content rules. OSX will supply ships and rigs to OGX and, Mr Batista hopes, to Petrobras too. He hints at other possibilities for co-operation with his giant competitor: perhaps it will dock its ships at his port and use his oil-treatment plant. And crucial to LLX’s plans is the expectation that global suppliers, forced to set up in Brazil if they want a piece of the oil bonanza, will choose Açu— where, as a bonus, they will face state sales taxes of 2% instead of 18%, a holdover from the area’s impoverished history. Mr Batista credits part of his success to his father, who pushed him out of the nest. During the 1980s and 1990s, when Brazil was suffering from hyperinflation and struggling to pay its foreign debts, Eliezer Batista, who put in two stints as chairman of Vale between 1961 and 1986 as well as a brief spell as minister for mines and energy, “thought, like many Brazilian fathers, that maybe Brazil would not make it.” Prospecting for gold around the world toughened his son up. But he bridles at any suggestion that his father provided any more concrete assistance, such as telling the labrador where to sniff. “Nothing was given free to me,” he says. His mining concessions were bought or claimed on terms that were available to everyone else, and likewise his oilfields. “I bid against Petrobras, Exxon, Shell, all the big boys, and I paid a billion dollars,” he says. He is touchy too at the suggestion that he poached talent from Petrobras. They retired and he rehired them, he insists. Mr Batista is neither a crony capitalist nor a self-made man, but something in between, says Sergio Lazzarini of Insper, a São Paulo business school. Part of his success is due to his vision and boldness—but he has also mastered the skill of developing and building on connections within government. He points to Mr Batista’s strategic generosity: a wad of cash towards a flattering biopic about the previous president, Luiz Inácio Lula da Silva; $12m towards Rio’s successful bid to host the Olympics in 2016; millions more to equip police in Rio’s favela s. And quite apart from whether EBX’s conglomerate structure makes operational sense, it certainly helps to get value out of such investments. “Links forged in one area of operations can be reused in another,” says Mr Lazzarini. A commonly muttered criticism of Mr Batista is that he is too good a salesman to be true. Creating buzz right through the oil-and-gas supply chain was essential to get firms to prepare for increased production, and hence to make Mr Batista’s grand plans come to fruition, says Lucas Blender of Geração Futuro, a stockbroker. But Mr Batista’s detractors dismiss him as the only person besides Bill Gates to have made billions from PowerPoint. His tendency to go to market soon after developing a concept can certainly misfire. Shortly after the 2010 listing of OSX, EBX’s shipbuilding arm, Brazil’s environment ministry refused him permission to build a shipyard in the southern state of Santa Catarina, which had been described in the prospectus as central to the company’s plans. Mr Batista picked himself back up and moved his planned shipyard to Açu. But the setback fed doubts about his ability to keep his glittering promises. In March Época Negócios, a Brazilian business monthly, put Mr Batista on its cover, with the caption: “And so, Eike, are you going to deliver?” That provoked a frenzy of tweets to his

865,000 Twitter followers. “And so, Época Negócios, when will you deliver reporting consistent with the facts?” ran one tweet. In another, he warned Época not to ask for access again. Mr Batista says he has already delivered plenty. EBX, he vows, will generate $1 billion in EBITDA this year, increasing to $10 billion by 2015. As for the idea that behind his showmanship there is little substance, he points to the various hardheaded types who have been through his books and gone on to become his partners. In 2010 Hyundai Heavy Industries, a South Korean shipbuilder, took a 10% stake in OSX. In January E.ON, a German energy firm, signed a joint venture with MPX. In March Mubadala, a sovereign-wealth fund from Abu Dhabi, bought 5.63% of EBX for $2 billion. Many of his assets have been confirmed by independent regulators, he points out, and all his public firms are listed on the Novo Mercado, the segment of São Paulo’s stockmarket with the highest standards of disclosure and transparency. Delivering everything he has promised will be tough for Mr Batista, says Mr Blender—but that is the price of fitting together so many pieces of Brazil’s commodity-and-logistics jigsaw puzzle. Last month IBM bought a 20% stake in SIX Automação, EBX’s technology-services subsidiary, and signed a deal to run all EBX’s IT operations for the next decade. The aim, says Rodrigo Kede of IBM Brasil, is to manage the conglomerate’s computing needs during a period of rapid growth, and to improve efficiency. “One idea we’re working on is a predictive model for the maintenance of drilling platforms.” Another is to use IBM’s “Smarter Cities” technology to plan and manage the residential areas that will grow up around LLX’s ports. Selling his projects, and himself, so hard was a conscious decision, says Mr Batista. He points to another, more pleasing magazine cover, framed on his office wall: a mock-up of “Eike Xiaoping” captioned: “To become rich is glorious”. According to Veja, a Brazilian weekly, Brazil’s newly minted millionaires model themselves on Mr Batista. After so long in the economic doldrums, Brazilian entrepreneurs needed a confidence boost, he says. Another reason why Mr Batista courts publicity is to encourage—or shame—other rich Brazilians into giving away some of their lucre, he claims. Mr Batista is paying to clean up Rio’s stinking Rodrigo de Freitas lake, but “Where are the other billionaires? Why don’t they adopt a lake?” Asked what worries him, he first says rising labour costs, but then changes his mind. People are always asking what he is afraid of, but he can think of nothing. “Give me time. Let me work,” he says. He has done enough to convince investors to give him more time. But sooner or later Brazil’s salesman will have to deliver.

Once in a lifetime

What three royal jubilees reveal about Britain
BEFORE Queen Elizabeth’s Silver Jubilee in 1977, the villagers of West Hoathly in Sussex were placed under secret observation. A file was drawn up, noting their views on the monarchy, the country and the impending celebrations. The royal family was marvellous but these festivities had better not cost too much, said one villager, recorded as “Nurse, female, 50”, explaining: “People are not in the mood.”

West Hoathly was reliably monarchist, the file records, with anti-republican sentiment boosted by recent American elections (“Fancy having Jimmy Carter,” a villager shuddered). But still its Jubilee enthusiasts sounded a bit bleak. We’re due a celebration, said “Male, 53”—we’ve made it to 1977 without a nuclear war. The files were commissioned by Mass Observation, a private social-research project that has studied the British since the 1930s. In all, 107 volunteers were recruited to record the Silver Jubilee. Their diaries and notes, together with complementary files on the 2002 Golden Jubilee, now form part of a vast archive held at Sussex University. On the eve of Queen Elizabeth’s Diamond Jubilee—to be marked from June 2nd to 5th—the archives offer a remarkably evocative glimpse of the recent past. The 1977 files describe a country that was tired and riven by industrial conflict. Its people talked of feeling a bit lost, and yet—from a distance of 35 years—they seem enviably grounded in a shared culture with deep roots. There was striking uniformity to their celebrations. Invited to have fun, people first grumbled then formed committees. It is remembered that at previous royal jubilees children were given commemorative mugs, prompting endless rows about paying for them. “The Vicar! He needs grinding up afresh, that one,” fumed a farmer’s wife in north Wiltshire, on learning that her Women’s Institute branch must buy mugs. “Not that I’m criticising him, of course,” she added hastily. Celebrations in 1977 involved children’s food—sausage rolls and jelly, hot dogs and ice cream— and beer for the grown-ups. There were violent sporting contests, from tugs-of-war to free-form football matches. To conquer reserve, fancy dress was worn, often involving men in women’s clothing. From the West Midlands came news of an all-transvestite football game, with the laconic annotation: “all ended up in the canal.” London displayed both patriotic zeal (flag-draped pubs in Brick Lane, big street parties in Muswell Hill) and hostility (cheerless housing estates, slogans declaring “Stuff the Jubilee”). Scotland was a nation apart. A file reports “total apathy” in Croy. In Glasgow the anniversary was called “an English jubilee”. Snobs sneered along with Scots. At Eton College, a wooden Jubilee pyramid was smashed by old boys. At Oxford University, examinations were held on Jubilee Day, in a display of indifference. The Silver Jubilee is not really about the monarchy, asserts a file from south Wiltshire: the day is about “people wanting a bit of fun”. A report from Wimbotsham in Norfolk, close to a royal estate at Sandringham, stands out for its focus on the queen’s 25 years on the throne. Locals held a service on the village green, praying for the monarch in “happy togetherness” under dripping umbrellas before a tug-of-war, races and tea for 700. By 2002 and the Golden Jubilee, Britain comes across as a busier, lonelier, more cynical place. The royal family was “just showbiz”, sniffed a diarist from Sussex. There is angry talk of Princess Diana and how her 1997 death was mishandled by the queen. There are fewer street parties than in 1977, all agree. This is variously blamed on apathy, the authorities (whose job it is to organise events, apparently) and above all on health-and-safety rules. In 1977, in contrast, one

Wiltshire village cheerfully let a “pyromaniac” doctor take Jubilee fireworks home to add extra bangs. The 2012 Jubilee finds Britain changed again. Diamond jubilees being rare (the last was achieved by Queen Victoria in 1897), the queen is firmly at the centre of the celebrations. Local councils have received more than 8,000 applications to close roads for street parties, suggesting that 2002’s passivity is fading. The country is not returning to 1977 and its home-made fancydress costumes or Coronation bunting dug out of attics. Today’s shops heave with Jubilee cakes, disposable decorations and flag-emblazoned baubles, letting consumers buy patriotism out of a box. After 60 years on the throne, a jubilee about the queen Visiting Wimbotsham, Bagehot is shown elaborate plans: cake-baking contests, pony rides, a teddy bears’ picnic, a sports day, a pensioners’ tea. But there will be no tug-of-war (people might hurt themselves) and the face painters have liability insurance. Still, the festivities will dwarf those seen in 2002, locals say. The monarchy endured a “big lull after Diana”, suggests David Long, the driving force behind Wimbotsham’s Diamond Jubilee. As the queen grows older, she is “more highly thought of”. Linda Nixon, a Wimbotsham pensioner, credits Prince William’s royal wedding with reviving enthusiasm. Prince William and his brother Prince Harry are “like everyday people”, she says. In the Mass Observation Silver Jubilee files, critics grumble about the monarchy costing too much or entrenching privilege. Supporters say the queen confers global prestige or offers a bulwark against constitutional meddling by politicians. In short, the debate is about the best way to organise society. In both Golden and Diamond Jubilee Britain, by contrast, the issue is whether the queen deserves to be respected, and whether the public can relate to her. In short, individualism is all. Diamond Jubilee Britain seems to be a hybrid. As in 1977, an unhappy nation fancies being cheered up, and the monarchy fits the bill. As in 2002, a truculent nation demands a monarchy on its own, emotional terms. Is that sustainable? Perhaps not, but it promises to be a fine party.

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