Western Union Company (WU)

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Western Union Company (NYSE:WU) is the world's largest money transfer company by transaction volume.^[1][2] The money transfer industry is susceptible to fluctuating economic conditions. This was the case during the financial crisis as consumers transfered less money. Western Union has historically focused on the US, so economic pressure in the region are particularly important. To mitigate this dependence, Western Union has moved to expand in developing countries like India and China.^[3]For the full year 2010, WU's total revenues amounted to $5.2 billion.^[4]

Business Overview

Business Segments

Western Union operates in two main divisions: consumer-to-consumer and consumer-to-business.

Consumer-to-Consumer (84% of 2010 of Net Revenue)

This segment includes transactions between private individuals, regardless of geography and has historically been Western Union's largest. The main customers for the consumer-to-consumer division are immigrants making remittances to relatives in their home countries.^[4]

Global Business Payments (14% of 2010 Net Revenue)

This segment allows consumers pay bills to businesses, such as mortgages and utilities, through physical, online, and over-the-phone money transfers. This division's revenues have mainly been generated from the U.S., but revenues in areas such as Central and South America have growing contributions.^[5][4]

Trends and Forces

Increased collaboration with other businesses to expand coverage

In order to reach more customers globally, Western Union continually establishes new relationships with businesses to expand coverage, especially in foreign and emerging markets. WU has established agreements such as one with the State Bank of India, the country's largest car loan lender to offer direct cash to bank account transfers.^[6][7][8]

Western Union has also completed strategic acquisitions to expand its coverage. This has been particularly the case for Europe. While these expansions help Western Union to gain more customers and enter new markets, they also increase the complexity of the business.^[9]

Sluggish domestic economy means less money transferred out

Economic weakness and competitive pricing dynamics, especially in the domestic U.S. market, have served to pressure revenue growth and EBITDA. Revenue per domestic transaction decline during periods of economic recession.^[10] These drops directly lead to a drop in revenue for the company. Because Western Union is heavily focused on the US, changes in the economy there are most dramatic.^[11]

Growth in India and China

Despite signs of an economic slowdown in North America, Western Union's inbound transactions to India and China have grown.^[12] Even with strong growth, these two countries still only account for a small portion of revenue, making continued growth possible. Many immigrants from developing regions like China and India use Western Union's services to pass money back to their families. Western Union in these developing countries may allow them to capture this market segment.^{[13][14][15][16]}

Increased competition pushing down prices

Though Western Union has the largest share of the international money transfer market and a larger footprint than any of its peers, growth among its competitors has increased competition in certain markets. Competitors like Moneygram have pushed to develop in the Middle East and other developing regions.

Competition

The money transfer industry is highly fragmented, with many small, regional companies forming most of the industry. The only two major players in the consumer-to-consumer market are Western Union and the much-smaller Moneygram International (MGI). Banks also compete with some of Western Union's services, but they often require customers to have accounts in order to transfer money. In the consumer-to-business industry, the market is even more highly fragmented, with the emergence of electronic payment systems like eBay's PayPal offering an Internet-based alternative to traditional money transfers.

References

1. ↑ Morningstar - WU research report
2. ↑ Euronet Confirms $1.65B Stock Acquisition Offer for MoneyGram - Seeking Alpha
3. ↑ WU 2009 Annual Report Press Release
4. ↑ ^{4.0 4.1 4.2} Zack's Investment Research "Western Union Delivers Ahead" 2/2/11
5. ↑
6. ↑ Bank Bazaar "Car loan lender joins hands with Western Union for cash transfers" 7/30/10
7. ↑ Business Wire "Western Union to Launch Mobile Money Transfer Service with State Bank of India" 9/29/10
8. ↑ WebCPA "CCH SFS to Offer Tax Refunds on Western Union Debit Cards" 8/30/10
9. ↑ Trading Markets "Western Union to Acquire Angelo Costa" 1/6/11
10. ↑ MarketWatch "Fitch Affirms Western Union's IDR at 'A-'; Outlook Stable" 6/29/10
11. ↑ WebCPA "CCH SFS to Offer Tax Refunds on Western Union Debit Cards" 8/30/10
12. ↑ WU 2007 10-K, Part II, Item 7, page 53
13. ↑ Migration and Remittances Factbook 2008 - India - World Bank
14. ↑ Migration and Remittances Factbook 2008 - China - World Bank
15. ↑ Remittance Trends 2007 (Briefing 5) - World Bank
16. ↑ StreetInsider "Susquehanna Likes Where Western Union Co. (NYSE: WU) Stands In India" 11/29/10