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Cash in hand


Western Union 2
Richard Handford

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Western Union is an iconic brand. The yellow-and-black logo is ubiquitous on streets across the world where it is associated, particularly for immigrants, with sending money home to their families.

But might Western Union, and rivals such as Moneygram, be facing a challenge that threatens to revolutionise their markets? On the face of it, sending and receiving money online or via smartphone looks like an obvious evolution in the marketplace.

This might explain the success of Xoom, a US company, which last week successfully conducted an IPO. Its share price has since shown a healthy rise as investors buy into a business model which targets immigrants to the US who want to send some of their hard-earned dollars back to their home countries, via PC and smartphones rather than searching out their local Western Union branch.

Although Xoom is tiny compared to its larger rivals, it appears to offer a major threat to the incumbents.

Its international remittance service is offered to 30 countries outside the US, although transfers from the States to the Philippines, India and Mexico are its mainstays. These three markets account for about three quarters of its business. Nearly one quarter of its transactions are carried out through mobile devices.

Xoom makes revenue by charging a fee on each transaction. Its revenue grew by 68 per cent in the first nine months of 2012 to $58 million. It has yet to reach profitability and reported a net loss of $4.3 million for the nine months to the end of September, 2012.

Its revenues are estimated to be only two to three per cent of Western Union’s. Or, looking at transaction volumes, only about five per cent of Moneygram’s size.

Rivals are unlikely to sit still. For instance, Western Union has made its own moves into the mobile market, for instance unveiling its own distinctive handsets at last year’s Mobile World Congress.

Nevertheless Xoom’s share price has risen approximately 50 per cent since launch although some observers are sceptical about its business model.

Blog Finventures pointed out that customers transfer money into Xoom from their bank accounts, making them dependent on banks. This feature also makes them different from its rivals’ set-up where customers pay cash over the counter.

In addition, banks provide the KYC (know your customer) services necessary to comply with US regulations.

“My guess is that volume has been too small for the banks or regulators to bother with Xoom. It is building its business on top of bank networks with no bank upside for participation. This is WU/MGI’s (Western Union/Moneygram’s) advantage of having cash in/out. They have their own separate network,” says the blog.

The blog struggled to see how a company of Xoom’s size can, post-IPO, have a value that is roughly 50 per cent (or more) of Moneygram’s market capitalisation. Maybe investors are buying into a vision of how remittance payments might work in the future. If so, Xoom will have to first unseat a legendary brand in the shape of Western Union. That will be an interesting test of customer loyalty.

The editorial views expressed in this article are solely those of the author(s) and will not necessarily reflect the views of the GSMA, its Members or Associate Members.

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