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Western Union Company (NYSE:WU) is the world's largest money transfer company by transaction volume, with 17% share of the global market in 2007.^[1] It dwarfs its next-largest competitor Moneygram International (MGI), which only holds 6% of the market.^[2] Western Union had $5.3B in revenue (2008), with 85% of those revenues generated by the "consumer-to-consumer" division (money sent between individuals) and consumer-to-business transactions accounting for 15% of revenue.^[3] The company also continues to expand its international reach, earning 65% of its 2007 revenue from international money transfers, up from 50% in 2002.^[4]

The money transfer industry is susceptible to fluctuating economic conditions, and sluggish conditions in the U.S./Canadian and Mexican economies led to 10% and 4% declines in revenue, respectively, from those regions in 2007.^[5] On the flip side, revenue in China and India grew by 37% and 44% in 2007, respectively,^[6] showing the high growth potential of these emerging markets. Overall global remittances, or money sent within and between countries, doubled from 2002 to 2007,^[7] increasing the demand for Western Union's money transfer services. This higher demand for money transfers, however, has also increased competition for Western Union as other firms expand in order to capture part of the growing market, resulting in more price competition between firms in the industry.

Business Overview

Business Segments

Revenue by division through 2Q2009.^[8]

2008 revenue and operating income by segment^[9]

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

• Consumer-to-Consumer (85% of 2008 revenue; 85% of 2008 net income) includes transactions between private individuals, regardless of geography. This segment 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. As more and more people relocate to other countries as a result of job opportunities, the international remittances industry has grown substantially in size, with an estimated $369 billion transferred across the world in 2007.^[10]
• Global Business Payments (formerly Consumer-to-Business (14% of 2008 revenue; 14% of 2008 net income) 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.^[8]

Geographic Distribution

In 2008, only 18% of Western Union's total revenue came from consumer-to-consumer transactions in North America (the U.S., Canada, and Mexico), down from 26% in 2007.^[11] During that same period of time, consumer-to-consumer revenue from international sources increased from 50% to 65% of total revenue. Western Union's Europe, Middle East Africa and South Asia (EMEASA) region contributed to 44% of revenues or $2,324 million. Its Asia Pacific (APAC) region contributed to 7% of revenues or $369 million, and its Americas region contributed to 34% of revenues or 1,796 million in 2008.^[3]

2008 revenue by geography^[3]

Trends and Forces

Sluggish domestic economy = less money transferred out

In 2007, domestic (U.S. and Canada) consumer-to-consumer transactions fell by 4%, resulting in a 10% decline in revenue for the region.^[12] In the same year, consumer-to-consumer transactions in Mexico grew by just 4%, but revenue from the country actually fell 4%, reflecting lower average revenue per transaction.^[13] Though the percentage of Western Union's consumer-to-consumer revenue generated in these markets fell from 26% in 2002 to 18% in 2007,^[14] they are still very important to the company's business. As economic conditions in the U.S., Canada, and Mexico have weakened, the resulting drop in money transfers among these countries has taken a bite out of Western Union's revenue and net income.

Double-digit growth in India and China

Total global inbound remissions, 2002-2007^[15]

Despite signs of an economic slowdown in North America, Western Union's inbound transactions to India and China grew 75% and 25%, respectively, in 2007; this transaction growth led to revenue increases of 44% in India and 37% in China for the year.^[16] Even with such strong growth, these two countries still only accounted for 5% of total revenue for the year, leaving much room for further growth. According to the World Bank, all inbound remittances to India and China grew by 72%^[17] and 98%^[18] between 2002 and 2007, during which time all inbound remittances worldwide doubled.^[19]

Increased competition pushing down prices

The 2007 decreases in revenue in the domestic and Mexican markets are largely the result of price cuts. 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. In the Mexican-U.S. corridor, for example, the average remittance cost fell by 55% between 1999 and 2004 as more companies entered the market and forced existing players to compete on pricing.^[20] This is the case in many of the markets in which Western Union was previously the only company to offer money transfer services. While Western Union's size lets it lower prices to remain competitive in a given country or region, these price reductions do inevitably maintain market share at the expense of profit margins.

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. ↑ ^{3.0 3.1 3.2 3.3} WU 2008 10-K
4. ↑ WU Annual Report 2007, page 3
5. ↑ WU Annual Report 2007, page 31
6. ↑ WU Annual Report 2007, page 31
7. ↑ Remittance Trends 2007 (Briefing 5) - World Bank
8. ↑ ^{8.0 8.1} WU 10-Q 8/4/2009
9. ↑ WU 2008 10-K, page 53-59
10. ↑ WU Annual Report 2007, page 3
11. ↑ WU Annual Report 2007, page 3
12. ↑ WU 2007 10-K, Part II, Item 7, page 52
13. ↑ WU 2007 10-K, Part II, Item 7, page 52
14. ↑ WU Annual Report 2007, page 5
15. ↑ Remittance Trends 2007 (Briefing 5) - World Bank
16. ↑ WU 2007 10-K, Part II, Item 7, page 53
17. ↑ Migration and Remittances Factbook 2008 - India - World Bank
18. ↑ Migration and Remittances Factbook 2008 - China - World Bank
19. ↑ Remittance Trends 2007 (Briefing 5) - World Bank
20. ↑ Hispanic PR Wire - New Study Reveals Challenges in Money Transfer Industry
21. ↑ MGI 2008 10-K
22. ↑
23. ↑ Google Finance: MGI