"Quick Look" at Todito.com and ePAID:
Innovative Remittance and e-Commerce Services


The Problem

There is a demonstrated need for low-cost, easily accessible international remittance services serving Mexico and the United States. Widely-available commercial wire transfer services, such as Western Union, charge high commissions and require recipients to travel to local branches in order to receive funds. Traditional banks are occasionally more versatile, allowing customers to withdraw funds from ATMs and generally charging a smaller commission. For customers to take advantage of these superior services, however, both the sender and the recipient must be clients of the bank. For Mexican families living on the economic periphery, this requirement presents a tremendous entry barrier to the financial services sector. Few remittance services employ Spanish-speaking customer service staff; even those that do occasionally encounter resistance from a customer base wary of unfamiliar brands and companies. Furthermore, these services do not offer alternatives to remitting – they are simple, one-channel tools.

Secondly, traditional e-commerce tools that rely on credit-based payments have not found a market in Mexico because of the low credit-penetration rate among the population. Credit is rarely made available to the lower and middle classes of Mexico due to high interest rates and uncertainty about future financial conditions. Compounding the problem, few citizens have the credit history or sufficient collateral required to obtain loans. Even Mexicans that do have credit cards often find shopping options limited by the standard retailer requirement of a United States or Canada shipping address. In order for e-commerce to become successful in Latin America, an alternative payment solution is needed.

Company Profile

Todito.com is an Internet Service Provider (ISP) and portal similar to those popular in the United States (Yahoo!, MSN, and Google, for instance) but it is written in Spanish and oriented towards a Spanish-speaking North American (largely Mexican) audience. The portal hosts e-mail accounts, user Web pages, a search engine, news, shopping, entertainment, online radio and television, and more. It has, quite literally, “todo” (all, or everything, in Spanish). The Web site’s traffic is self-reported to be about 1.4 million unique users per day. Monthly, Todito.com attracts about 4.3 million unique users, almost all of whom are Mexican. The user base is split fairly equally between the sexes, and 78 percent of visitors are under 35 years old. Todito.com began as a joint project between TV Azteca (a network television company) and Grupo Dataflux (education and information technology provider) of Mexico and has been online since March 2, 1999. The company has reported positive EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) for the last 3 fiscal years and is consistently ranked among the top 5,000 most visited Web sites worldwide by alexa.com. A large portion of the company’s growth has resulted from the huge demand for Todito.com’s pre-paid Internet cards – available in much smaller denominations than those of the competition – making the ISP more attractive to low-income Internet users.


The Internet technology for the transfers is provided by eCatalystOne, an Internet technology company based in Newport Beach, California, that works to develop non-credit based payment solutions. After playing a role in the pre-paid cellular market in Mexico during the 1990s (with Mexican telecom giant Telcel), eCatalystOne recognized the market for a cash-based e-commerce tool that was pre-paid, unbranded, and able to handle micro-payments - leading to the development of ePAID. The key to ePAID is an important innovation called iProxy, a tool that allows eCatalystOne to tap into already-existing e-commerce networks like Amazon.com. The iProxy software is patent-pending. Since 2000, eCatalystOne has licensed ePAID for use by several important e-commerce players, including EsMas (one of Todito.com's largest competitors), Friendsandfamily.com, Mor-data (of Turkey), and Todito.com.


Market Overview

In 2000, there were 20.6 million people living in the United States who identified themselves as “Mexican,” “Mexican American,” or “Chicano” according to the Census Bureau. This amounts to 7.9 percent of the U.S. population. Approximately 6.7 million of these Mexicans are foreign-born. It is likely that the majority of foreign-born Mexicans living in the United States have ties to family in Mexico. As a result of this cross-border migration, there is a remittance market between the United States and Mexico that totaled US$13.266 billion in 2003 alone, a whopping 35.2 percent increase from 2002. Because Mexican immigration into the United States shows no sign of slowing, the remittance market will likely continue to grow in the coming years, spurring demand for a versatile, low-cost remittance tool.

The Internet is the driving technological force behind the versatility of ePAID. Currently, more than half of the United States population is online. The enormous demand created by this community has caused the growth explosion of the information technology (IT) industry, which encompasses the ISP sector, e-commerce, advertising, and more. It is now possible to access the Internet from nearly anywhere in the country. In Mexico, the amount of Internet users nearly tripled from 36 to 98 users per 1000 people in just one year (2001-2002). In the same year, government spending on information and communication technology (ICT) increased from US$196 per capita to US$2097 per capita. As the government continues to invest in the ICT sector, more and more Mexican citizens will become connected to the Internet.

In recent years, a wide range of commercial enterprises have been established to serve the remittance needs of the Mexican-American community. There are over 200 registered companies, including Western Union and Money Gram, providing wire-transfer services between the United States and Mexico; these firms control approximately half of the remittance market. American banks with branches in Mexico also offer international money transfers at a fixed commission rate; banks and credit unions control approximately 5 percent of the remittance market. However, there are many problems with the services offered by traditional banks and wire-transfer services. First, the flat fees offered these services are only cost-effective for customers that transfer large amounts of money. The remittance market, meanwhile, is comprised mostly of blue collar workers who prefer to send a portion of their paycheck to relatives on a weekly, bi-weekly, or monthly basis. Additionally, most banks require that both the sender and the recipient of the funds be clients of the bank, limiting the services’ customer base to only those Mexicans that are wealthy enough to keep their assets in banks (and thus are not typical of the remittance market, even if they are a part of it). Other problems include the lack of Spanish-speaking support staff and hidden “conversion” fees for changing money from US dollars to Mexican pesos. Traditional wire transfer services charge extraordinarily high fees to send money across borders, and there are often a limited number of branches located in developing countries like Mexico.

The remaining 45 percent of the Mexican-American remittance market is comprised of informal agent networks, who charge fees and interest rates that vary widely. Recent immigrants to the United States often turn to these agents for their remittance needs because they are familiar with them and therefore trust them. This trust is often misplaced, however, as informal agents are known to exploit their customers by charging above-market interest rates and transfer fees. Some agents require that transactions take place in cash, and openly skim off the top. Clearly, there is a need for a better, more efficient, more secure remittance option than the wire transfer, bank, and informal network services that currently dominate the Mexican-American market.

For many Mexicans in the United States, especially illegal aliens, e-commerce is not an option. With the exception of gift certificates bought with cash in a store and redeemable online, all e-commerce is credit-based. Obtaining a credit card is impossible without a social security number and an established credit history – neither of which is available to new immigrants. In Mexico, there are different limitations. In a country where 88 percent of all transactions are cash (as compared to 32 percent in the United States) and less than one third of the population has access to financial services, enterprises that rely on credit as their only payment option are doomed to failure. Even the small credit-card wielding contingent of the population finds it difficult to engage in e-commerce. Some retailers will not take credit cards unless the customer can verify the (US) zip code, while others require a shipping address in the United States or Canada. Compounding the problem, few Internet retailers offer Spanish translations of their Web sites, and even fewer offer wares in Spanish (books, music, and software).


Business Model

Todito.com aspires to become the principal Internet platform connecting Mexicans with the Spanish-speaking population of the United States (it is currently overshadowed by EsMas.com, which has an audience several times the size of that of Todito.com). Part of its mission is to expand the Internet marketplace between the two countries. Unfortunately, only 10 percent of Todito.com’s users report from the US, a major obstacle to the realization of this goal.

The company also aims to become an important player in low-denomination, pre-paid Internet (and long distance telephone) cards in Mexico. According to company officials, Todito.com saw an opening in the ISP market before the dot-com bubble burst in the 1999. At that time, most Internet users were wealthy; essentially, the market was limited to those with access to credit and therefore, could subscribe to unlimited-access Internet accounts. In order to reach the rest of the Mexican market, where pre-paid calling cards and mobile phones had already proved to be popular, Todito.com asked themselves, “How much money can an average Mexican carry in his pocket at one time?” Shortly thereafter, they pioneered the production of pre-paid Internet cards. Rather than serving the poorest of the poor, Todito.com targeted the population of lower-income citizens whose disposable incomes allow them to make regular purchases of low-denomination services, like their pre-paid cards, which come in values as low as MXN$40, or US$3.48, for 300 minutes of Internet access. With a Gross Domestic Product (GDP) per capita (Purchasing Power Parity [PPP] adjusted) of approximately US$9000, these cards are affordable even for the modestly comfortable Mexican citizen. Survey data shows that residents of developing countries are willing to spend roughly 5 percent of their income on telecommunications services; in this case, a family could purchase ten hours a month of Internet time for just US$83.52 a year, less than one percent of total income. In fact, Todito.com expects its largest growth for 2003-2004 to come from the pre-paid arena. One reason for this growth is the price of the competition’s pre-paid Internet cards – most come in denominations only as low as MXN$100, which is more than twice as much as Todito.com’s least-expensive, MXN$40 card. Today, most of Todito.com’s users are representative of the socio-economically average Mexican citizen.

In addition to low-denomination pre-paid cards, Todito.com seeks to engage the low- and middle-income Mexican market through ePAID. The mission of eCatalystOne’s ePAID is simple – to provide a cash-based payment platform that supports e-commerce and remittance services. ePAID facilitates low-cost money transfers between workers in the United States and family in Mexico. By allowing people to ship goods to friends and family in Mexico, ePAID eliminates the need for hard cash transfers. For those who do wish to transfer cash, there are small, affordable fees. For their ePAID venture, eCatalystOne partnered with Mexican banks like Scotiabank Inverlat, Intermex, Banco Bital, Dimex, and the money transfer service RapidMoney to ensure that their customers can withdraw cash funds from their ePAID accounts at ATMs or “Casas de cambio” across the country. Because ePAID is not credit-based, there is no risk involved for the company or the consumer. Opening an ePAID account does not require the divulgence of any financial information and, since the ePAID system is not connected with credit or banking networks, all client information remains secure. More importantly, consumers without access to credit can open accounts using cash. Although eCatalystOne originally intended ePAID to be primarily an e-commerce tool, its cash-based functionality facilitated its evolution into a remittance instrument. The company also designed ePAID so that each buyer could manipulate the interface to appeal to their unique user demographic. Todito.com, along with other retailers that have ePAID licenses, has designed a user interface to appeal to its target market.

eCatalystOne actively sought out the partnership with Todito.com, recognizing that brand familiarity would play a big role in the success of the product. Negotiations between the two companies began in 2000, with eCatalystOne working to integrate ePAID into Todito.com’s Internet portal. A contract was signed in 2001, and Todito.com launched ePAID in 2002. Since its launch, ePAID has been a profit-center for Todito.com. Because the system is self-maintaining, and does not require additional staff, hardware, or software, all ePAID transactions generate additional revenue for Todito.com.


Products & Services: How ePAID Works with Todito.com

Clients sign up for free accounts on Todito.com’s ePAID site, then transfer funds into these accounts via Western Union or a bank account in the US or Mexico. Deposits into ePAID accounts from bank accounts in the US carry no fee; from banks in Mexico, the charge is US $0.81; and transfers via Western Union cost US $5.00. The less-expensive bank account option is preferred among users in the United States, even by illegal immigrants. Mexicans in the US can get an identification card from a Mexican embassy or consulate that enables them to open a bank account, regardless of their legal status. For users in Mexico, where financial services for the poor are limited, Western Union is a better, though more expensive, option. It is worth noting that, as a remittance tool, ePAID and Todito.com is bank-dependent; users on both ends of the transactions must interact with an established financial institution. Once money has been transferred into an ePAID account, however, the opportunity for innovation in the remittance transaction arises.

The client can then do a variety of things with his money. First, there is online shopping at local Mexican shops and established international retailers including Amazon.com, Barnes & Noble, Brooks Brothers, cdnow.com, CD Universe, fragrancenet.com, Tower Records, Delia’s, and Personal Creations, all of whom ship to Mexico. Retailers that do not ship to Mexico include babiesRus.com, drugstore.com, E-style, Fogdog, Illuminations, Imaginarium, J. Crew, KB Toys, Land’s End, Old Navy, petsmart.com, Sephora, Target, and toysRus.com. The user can have the merchandise shipped either directly to him or to another recipient of his choice. All online purchases are free of charge, no matter where the transaction originates.

Secondly, money can be sent directly to another user by transferring funds into another Todito.com ePAID account, either in the form of a gift certificate or as a regular transfer. Transferring money between ePAID accounts costs US $.26 per transaction. The recipient can chose to make an online purchase with this money, or to withdraw it at a nearby bank, ATM, or RapidMoney center. Money can be withdrawn from ePAID accounts for a fee that varies depending on the method of withdrawal and the geographic location of the ePAID client. This fee encourages customers to spend money at online retailers once it has been deposited, generating revenues for eCatalystOne’s partner stores. If an account is inactive for 3 months, Todito.com charges $2.65 per month to maintain the account.



Todito.com currently supports nearly 9,000 active ePAID accounts. About one quarter of users report from the US, with 70 percent logging on from Mexico and 5 percent from other countries. The ePAID population is overwhelmingly young (and representative of the demographic of Internet users in general), with 77 percent of users being 35 years old or younger. Sixty-three percent of users earn US$1000 or less per month. The average expenditure is US$60.


Support

The Todito.com interface is user friendly and easy to navigate. Customer support is available through e-mail to a generic “questions and comments” address. The list of fees for specific actions (especially withdrawal of funds in Mexico) may be difficult to decipher for a barely literate or poorly educated person, but it could be transferred into simpler terms and posted in an Internet kiosk, bank lobby, or NGO targeting migrant workers.


Challenges

Todito.com ePAID is an innovative tool that combines remittance services and e-commerce technology in a way that has potential to benefit the 52 percent of the Mexican population that lives on less than $10 per day. Unfortunately, innovative technology and a good business plan do not automatically mean success. Todito.com needs to find a way to market itself to Hispanics in the US in order to increase its profit from commissions on ePAID.

Tapping into the US market, already saturated by Yahoo!, MSN, Google, etc, will prove to be difficult for Todito.com, especially since most other portals already offer user interfaces in Spanish. The key to winning clients will be using content that appeals specifically to a Mexican or Hispanic audience, taking advantage of Spanish-speaking support staff by increasing availability to “help,” offering a search engine that links only to Spanish language pages, and word-of-mouth recommendations from users in Mexico to family and friends in the United States. Brand recognition will also play a big role once Todito.com.com has gained a consumer base among Mexican Americans. Additionally, Todito.com’s advantage in pre-paid Internet will not translate well to the US, where most Internet users are subscribers. However, Todito.com is confident that 2005 will be a good year for them in the US market. In Mexico, EsMas.com will continue to offer strong competition, along with Terra.com and AOL Mexico also in the market, albeit to a lesser extent.

Additionally, although Todito.com has reported positive EBITDA for the last three years, this will be difficult to maintain, as demonstrated by the dot-com meltdown of the late 1990s. Todito.com needs to continue expanding its user base to remain attractive to advertisers. Unfortunately, the necessary growth has not occurred during the last year, in which the portal’s reach per million users has fallen off as much as 15 percent in 3 months.


Key Lessons

Although there are a lot of players in the remittance market, eCatalystOne’s ePAID stands out because it offers something unique – a combination of remittance and e-commerce tools that is easy to use for anyone with Internet access (provided by Todito.com’s pre-paid Internet cards, for instance). Todito.com, appreciating the importance of brand recognition, has leveraged its popularity as an ISP and portal to break into the remittance and e-commerce markets. The key to Todito.com’s success, however, was not in creating a market for a product, but rather in finding the right product to meet the demands of an existing market. This model describes their success not only with eCatalystOne’s ePAID, but also with their now-wildly popular pre-paid Internet cards.


Future Plans

eCatalystOne (now Debisys) hopes to expand the services offered by ePAID into another area – bill pay. Pre-paid bill pay will allow immigrants in the United States to pay the bills (phone, electricity, water, cable, etc.) of family members in Mexico, making it highly useful for Todito.com’s purposes. However, this expansion may take time, since few Mexican utility companies currently offer online bill pay options. ePAID is also auction-friendly, meaning that it can be used like Paypal® for user-to-user payments at online auction sites. This utility has not yet been taken advantage of by eCatalystOne’s partners. Lastly, the ePAID technology has mobile capabilities. From a mobile phone, account holders can make person-to-person payments or shop at on- and off-line retailers. This mobile usage has important implications for future expansion. An ePAID Smartcard could be used to make purchases at local branches of associated online retailers (for example, a Barnes & Noble store). With an appropriate credit card partner, ePAID could be used anywhere that credit cards are accepted.

Todito.com expects ePAID to converge with other applications at the point of sale, as well. However, they also believe that it will be about two years before the average consumer is familiar with, and has accepted, pre-paid Internet shopping. Todito.com has not promoted ePAID as much as their already well-received television and online shopping branches, recognizing that it will take time for the market to be receptive, as is often the case with emerging businesses. Todito.com does plan to continue expanding their pre-paid Internet card market, however, both in the United States and in Mexico. By expanding the services associated with their cards to include long distance calling, for instance, Todito.com will continue to realize a profit while meeting the needs of the Mexican-American community. Low-cost long distance is in high demand, especially for those families separated by national boundaries.

Special thanks to Dennis Andrews, former Chairman/CEO of eCatalystOne and current CEO of Debisys, and Adrián González, COO of Todito.com for their cooperation in helping us to compile this information.

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