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Western Union: the end of permanent leadership in cross-border consumer money transfers

“… long, sorry decline has left the 140-year-old company a shell of its former self. Today, it is fighting for its very survival. Western Union fell victim to technological advances…”

Associated Press, 1991

Reading current reporting about Western Union’s role in international remittances could make us think that the company has been a successful monopoly of this space forever, but, now, with the arrival of some disruptive innovation (“P2P”, “Bitcoin-blockchain”, “Social”, “Mobile”…), there is a real danger of its imminent demise. In reality, Western Union’s subsidiary, Western Union Financial Services Inc., began providing international money transfers in the mid-80s when deregulation allowed a previously domestic service to expand internationally. By the mid-90s, Western Union’s coverage included major remittance destinations like China. In those first ten years of its money transfer business, Western Union (renamed “New Valley” in 1991) had plenty of upheavals going near or into bankruptcy. After changing hands a few times, the money transfer subsidiary was resurrected as an independent entity in 2006. Western Union’s stock performance has been highly volatile ever since dwarfed by the overall market:

After a faster initial growth, since 2014, Western Union’s transfer volumes have been stagnant until the start of the Covid pandemic in mid-2020, despite the remittances market growing by 20+% during the same period. The volumes finally picked up in late 2020 as Western Union’s digital channels started to gain scale in the overall business mix. However, the lower margin of digital transfers resulted, on balance, in overall static revenue over the last decade.

Western Union’s disappointing performance is no surprise, given its history of complacency about fintech disruption. In a June 2019 interview, a senior executive brushed off Fintech competition:

In a bold move in 2019., Western Union closed its digital office in San Francisco as part of an enterprise-wide cost-cutting initiative to centralize all activities in fewer and more cost-effective locations. Initially perceived as a threat to its digital ambitions, the closer integration, however, proved to be the right strategy during the Covid pandemic.

Besides the extended development time for its digital strategy, Western Union also took nearly a decade to strengthen its compliance and risk management, finally settling the last FTC lawsuit in January 2017.

“Even though Western Union’s internal reports have identified agent locations where 5% to over 75% of the transactions constituted confirmed and potential fraud, and/or suspicious activities, Western Union has allowed many of these agents and subagents to continue operating, with only temporary suspensions, if any…”

While Western Union’s current valuation hovers around $5 billion, its story of perseverance appears less captivating to most publications. Instead, sensational reporting seems to focus on Western Union’s potential demise, attributing it to the latest innovation du jour, be it Facebook or Bitcoin or the rise of FinTech startups, replacing the once-feared “fax machine” or “Internet” threats.”

source: https://www.cnbc.com/2021/09/09/el-salvador-bitcoin-move-could-cost-western-union-400-million-a-year.html

1. Western Union’s Market Share

Like many aspects of international consumer remittances, Western Union’s market share presents a complex picture. Since 2009, it has been gradually declining as the company struggled to keep pace with the growing and ever more intricate cross-border consumer money transfer market.

The remittances market’s remaining share is highly fragmented, with numerous banks and MTOs of varying sizes competing in each major corridor. Western Union’s market share is also not evenly distributed across global corridors. For instance, historically, in the world’s largest remittance corridor, USA-to-Mexico, Western Union’s market share has been closer to 20%.

Mexico Remittances Market Share Change 2014 2017
Source: https://investors.intermexonline.com/news-events/events

In various large corridors, Western Union’s market share is less than 10%, while in some smaller corridors, it approaches 50%. Criticizing Western Union for offering services in places where there is little to no competition would be akin to labeling a single gas station in a small town as a “monopoly.”

2. Western Union’s track record of innovation

While many Bitcoin and FinTech startup enthusiasts love to recount Western Union’s rejection of the “talking telegraph” in 1876, they often overlook the fact that the company maintained a telegraph monopoly for the next 100 years and introduced numerous innovations during that period.

While PayPal boasted the first email transfers in 1999, Western Union was quick to embrace the online world in 2000, forge mobile partnerships in 2007, and launch a smartphone application in 2011—before TransferWise and Remitly were even on the scene. Despite TransferWise’s savvy use of data for referral traffic and Remitly’s “mobile” innovation, Western Union has been at the forefront of adopting various cutting-edge technologies. Its extensive use of “big data,” exploration of a partnership with Ripple Labs, and investments in blockchain, all debunk the popular narrative that labels Western Union as backward and ignorant.

Adding to its list of achievements, Western Union was the first to forge partnerships with WeChat and Viber. Why would such innovative providers choose to partner with Western Union? While the company’s technical capabilities in executing complex integrations are unmatched, the primary reason lies in consumers’ trust. When it comes to money transfers, Western Union has enjoyed a level of trust that few can match.

Western Union WeChat Viber

Here is how Western Union’s former CEO described the company’s approach to innovation in May 2018:

WU CEO Quote about Ripple Q1 2018 Investor Call Transcript

Even before establishing a dedicated online-mobile unit, Digital Ventures, in San Francisco in 2011, Western Union’s digital business already surpassed Xoom‘s, digital native player, in size. Since then, the company maintained an annual growth rate of around 20% for its digital business till 2021.

Despite more recent struggles, Western Union continues to stand as one of the leaders in the digital cross-border consumer business, on par with leading fintech companies.

Western Union’s mobile application is on par with the competition, with only a slight gap compared to leading fintechs.

It is also important to consider that 80% of new Western Union digital customers are entirely new to the company, having never used Western Union in any capacity before. This indicates relatively little cannibalization, around 2%, from Western Union’s offline to digital channels. Instead, the company successfully attracts entirely new customer segments. Contrary to the myth fueled by Fintech PR, actual demographics segmentation of customer bases for incumbents across financial services shows that so-called “millennials” exhibit a similar preference for trusted brands (aka “incumbents”) as other generations.

Millenials use Western Union Investor Day 2016

Western Union achieved significant growth in online engagement by developing dedicated Facebook pages for Filipino, Indian, and Latino customers, the company introduced an innovative approach.

Western Union Celebrating 5MM Facebook "likes" - June 2015
Western Union Celebrating 5MM Facebook “likes” – June 2015

Western Union’s digital transformation extended beyond customer engagement. Between 2016-2017, the company invested $120 million in “WU Way,” an efficiency program primarily focused on severance (40% of all costs) and consultants (25% of all costs). The objective was to digitize operations, consolidate off-shore IT locations, and reduce staff, aiming to achieve $20-25 million in annual savings.

WU Digital Coverage May 2017

By April 2019, Western Union’s outbound digital services were available in 75 countries, with mobile apps accessible in 35 countries. The company kept expanding its digital footprint, onboarding 20 countries by 2010, 23 in 2011, only 2 in 2012-2014, 9 in 2015, and 20 in 2018. Of course, the US remained Western Union’s top focus, so despite this global expansion, Western Union’s international share of the consumer cross-border business has remained relatively stable, around 70%.

By 2019, Western Union’s digital footprint covered over 95% of the world’s outbound send countries by transfer volume. The remaining countries were either too small or constrained by government regulations that prohibited online remittances. However, the primary challenge for digital transfers was the slowly changing habits of money senders. Despite 70+% of Western Union customers having bank accounts, it took a global pandemic to witness a one-time acceleration in the adoption of digital transfers.

The lack of a faster rise in digital usage is not due to an inadequate digital offering. Instead, it stems from the substantial variation in digital channel usage based on specific corridors or, more precisely, ethnicity. As we’ll discuss later, there are fundamental differences among major migrant groups in the US, such as Indians, Filipinos, Chinese, Mexicans, and others. One such difference is the ratio of disclosed income, with Indians, mostly in white-collar jobs, having a very high ratio. However, many other nationalities, such as babysitters, gardeners, or cab drivers, often get paid in cash and prioritize avoiding taxes over using digital channels. For them, the concern of being reported to the IRS outweighs the potential savings of a few dollars.

As a consequence, Western Union fell significantly short of its own expectations in 2012 to achieve $500+ million in Digital revenue by 2015. Instead, that goalpost was only reached by early 2019.

3. Western Union’s offline performance.

In the offline world, Western Union’s agent network expanded from 200,000 agents in 2006 to 485,000 in 2011. However, the growth rate slowed significantly, and by 2017, the number only increased to 550,000. The slowdown in adding new agents can be attributed to around 30% of existing agents already not seeing any remittances, as reported in the 2016 annual filing:

“As of December 31, 2016 , more than 70% of our locations had experienced money transfer activity in the previous 12 months”

Western Union is not unique in its business-savvy prioritization of where to offer its services. Despite fintech remittance startups posturing about helping the “poor” and “unbanked,” they often set up offices in the world’s wealthiest cities, targeting well-off and tech-savvy senders. These startups conveniently accuse Western Union of being a high-price monopoly. Below on the right are some of the world’s most expensive corridors; one can check which startups are offering services for those corridors.

Source: https://www.knomad.org/publication/migration-and-development-brief-38

Talk is cheap, and venture capitalists can be very impatient. Selecting a smaller corridor with a small percentage of tech-savvy users may not seem lucrative enough. So don’t be surprised by how Remitly’s founder explained his motivation when launching the startup in 2011 vs. what he actually did (read the full story here):

Remitly Founder on reason for startup Oct 2011
Source: GeekWire, October 28, 2011

Words like “kid,” “education,” and “Africa” were essential components of any pitch deck. Interestingly, in 2011, the only practical way to send money from the US to Kenya was to start another company. While one might assume Remitly would start with Kenya, it turned out that the volume of remittances there was not substantial enough, and the market lacked the desired tech-savviness. Instead, Remitly began its journey with the Philippines, followed by India, China, and Latin America. Years later, the company expanded its outbound business beyond the US into Canada and the UK. It took nearly a decade before Remitly finally made Kenya one of its available destinations

This anecdote is relevant to our question about Western Union’s leadership position as it exemplifies a common mindset among remittance startups. Instead of challenging Western Union’s market share in areas where it lacks an online presence, these startups tend to target the same “top” corridors where Western Union’s digital business is already well-established. This approach highlights the intense competition for a share of the same customer base, which has obviously impacted Western Union’s market dominance in the world’s top destinations.

Source: https://www.knomad.org/publications

Instead of Lagos and Sao Paulo, fintechs have opened offices in Denver and New York, coming to Western Union’s home turf.

Money transfer illustration of competitiveness

4. Western Union’s competitive zeal

Western Union’s underwhelming performance is not for lack of effort, and it extends beyond innovation. Despite commanding a 15% pricing premium for its brand overall, Western Union applies significantly different margins across corridors. The company frequently adjusts fees based on transfer amounts and send-receive methods. While this practice may not always be consumer-friendly, it demonstrates Western Union’s considerable effort to maximize profits. As described by Western Union’s former CEO in May 2018:

WU CEO Quote about Pricing Strategy Q1 2018 Investor Call Transcript

In 2020, Western Union acknowledged even adjusting pricing based on ethnicity, validating ethnic stereotypes about savings and comparison shopping attitudes and demonstrating that such insights are utilized to make money at scale.

For example, Western Union’s FX markup for sending money from the USA to India was one of the lowest among the competition, but for the USA to the Philippines – it was one of the highest:

India FX Markup April 2 2019
Philippines FX Markup April 2 2019

What could explain such differences in tactics for two corridors that are quite similar in size and located in the same region on a global scale? To understand this, let’s review the income and education levels of Indian and Filipino migrant groups living in the USA:

Migrants in USA by income and education

Indians are remarkably ahead of other main migrant groups in education, which sets them apart in their engagement with remittances. Over 80% of money transfers conducted by this group in the US are carried out online. From a cultural standpoint, Indians are significantly more inclined to compare prices and switch providers, making their behavior distinct when it comes to remittance choices.

Customer complaints about Xoom's higher prices and switches to TransferWise

For other migrant groups, the average use of digital money transfers is less than 10%, with Filipino senders from the USA showing slightly higher digital adoption. Additionally, other migrant groups exhibit less price comparison behavior and are less prone to switching providers. Consequently, Western Union must and is far more competitive in the USA-to-India corridor.

As an example, upon noticing TransferWise’s activity in the UK in 2017, Western Union reduced margins and offered specials to safeguard its market share. With Chinese customers, the challenge lies in a culture of secrecy and mistrust of formal channels. To gain a foothold in this segment, Western Union has at times offered literally free transfers for some send-receive methods in order to gain a foothold in this segment:

“…We do have corridors, which is zero FX. We do have corridors, which are higher FX, zero fees. We do have corridors where there’s both are that. It’s really like an airline management where you fly from one destination to another destination, which seats you for use, and that’s exactly what we are doing with our teams. I think, in the portfolio management, the team is impressive. It’s really looking at every corridor, understanding the customer needs on FX side.”

5. Western Union’s Future

Investors may experience “bullish” or “bearish” mood swings, but in the long term, only actual results, revenues, and profits truly matter to them. If you take another look at the chart of Western Union’s stock prices since the IPO at the beginning of this article, you’ll likely notice two massive sell-offs—one around the 2008 financial crisis and another when Western Union warned about precipitous reductions in margins in 2012. Since then, Western Union’s revenue has remained stable.

However, in terms of money transfer volumes, Wise (formerly Transferwise) finally caught up to Western Union’s four decades of domination in 2022. The reason Wise is still behind in revenues is due to the fintech company charging a much lower markup for transfers (aka “take rate”).

In 2022, it seemed that Wise was overtaking Western Union in the dominance of consumer cross-border transfers, but WU’s on-going turnaround coupled with Wise’s rapid deceleration makes the outcome far less certain.

But how did Western Union lose its dominance? Similar to Xoom, Western Union had an early start advantage over fintechs but failed to fully capitalize on it. By dismissing fintechs until a few years ago, Western Union’s leadership missed a crucial point about the high growth rates of those startups. When such growth happens year after year for more than a decade, a tiny startup could catch up to a leader.

Here is again how nonchalantly Western Union’s former CEO viewed competition in 2018:

WU CEO Quote about pricing Q1 2018 Investor Call Transcript

However, don’t expect Western Union’s demise anytime soon. When we look at the long lines at overpriced coffee shops, it would seem odd to consider those consumers as victims of a traditional latte cartel taking advantage of its customers with slow and expensive service. So why should we think differently about consumers who willingly stay in line at Western Union’s cash agents, pay more for the service, and prefer that experience?

Long line in Starbucks

It wasn’t always the case, but today’s consumers are generally satisfied with their options for cross-border remittances. There are very few complaints, and half of those pertain to fraud (read the report here). Additionally, the margins in the industry have been steadily falling over the last three decades, experiencing a 30% drop in the last 10 years alone, bringing them to less than 5% today:

Western Union is undoubtedly, though somewhat reluctantly, part of that margin decline of a cross-border consumer money transfer industry. Its markup went from 5+% to less than 4% over the last decade. As the future unfolds, it is likely that Western Union will continue to make reluctant adjustments experiencing a very gradual market share decline. The leader of the past is no more, but not fully disrupted yet.

Conclusion

Hopefully, you found this overview helpful in developing your own point of view on Western Union’s chances to remain among the top players.

We will be keeping this post regularly updated, so come back soon!

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