Will Bitcoin And Walmart Force Western Union To Change Its Business Model?

By James E. McWhinney AAA

Western Union Co. (NYSE:WU) is recognized across the globe for providing a fast, efficient way to move money. Just walk into a Western Union office and you can transfer money to friends, relatives or business partners halfway around the world. While the company is well-known for its asset-transfer technology, the firm was founded on quite a different business model. When it launched in 1861, it was known as the New York and Mississippi Valley Printing and Telegraph Co. Business expansion via acquisition of other telegraph companies led to a name change in 1856, when the company became known as Western Union. Today, the global asset-transfer giant founded on technology faces a host of upstart rivals that bring to market asset-transfer technologies of their own.

Evolution

Western Union wasn’t always the company you see today. After mastering the telegraph business, it expanded its horizons and entered the money-transfer business in 1871. In 1980, revenue from money transfer surpassed revenue generated by the telegraph business. By 2001, the year the firm celebrated its 140th birthday, it was offering its services through 100,000 locations across the globe. The expansion continued and, by 2012, the firm boasted half a million locations.

The innovation continued beyond physical office locations with some 100,000 automated teller machines (ATMs) also offering money-transfer services via Western Union. Other services include bill payment, money-order issuance and pre-paid credit cards. Fees range from $5 to more than $20 depending on the delivery speed of the chosen transfer methodology. Times range from a day or two at the low end to five at the higher end. The faster you need the money, the higher the fee.

Scams

Western Union’s global reach and convenient transfer service have also come with a bit of downside. The company’s success has made the firm a favorite choice for a variety of criminals seeking fast, anonymous money movement. Unsuspecting victims are encouraged to transfer money to the criminals via Western Union. The victims believe they are making a purchase or funding an investment, so they walk into the Western Union office and hand over cash. They receive a series of numbers in return, which they then give to the seller/business partner they believe is waiting for the money. That person goes to a Western Union office and gives the clerk the series of numbers. The clerk hands over the cash. It’s a quick, convenient method of moving money. It’s also an easy way to scam unsuspecting people.

Despite the fact that Western Union employees should be checking the identification of cash recipients, thieves seem to have no trouble getting past this hurdle. A fake ID, a friend who works at Western Union, a lax clerk or a few dollars' bribe are all it takes for thieves to bypass the system. Once the thief has the money, there is no way to get it back.

Western Union is well aware of these scams. The company warns customers about the potential for fraud, discouraging them from using Western Union to pay for online purchases or transfer money to strangers. Sadly, the lure of a good deal, the naïve belief that you can get something for nothing and the allure of plain old greed cause many people to disregard the warnings.

Threats to the Business

While Western Union’s customers need to be wary of the threat of scams, the firm itself faces some threats in the form of new competitors. Today, the company with a long and storied history of successful technological innovation is facing a host of newcomers seeking to make their own marks in the money-transfer business. Many of these competitors are using business models based on virtual currencies or digital wallets that facilitate electronic money movement.

Bitcoin, for example, provides a convenient, anonymous way to move money. While the hacking of Mt. Gox, the world’s largest Bitcoin exchange, was a notable setback for this particular virtual currency effort, virtual currency isn’t going away any time soon. Websites like Facebook (Nasdaq:FB) are entering the fray, and other new entrants can certainly be expected. Facebook and other websites benefit from their massive, global user bases - with each user representing a possible customer.

Telecommunications companies are making efforts of their own to build market share in the money-transfer business. T-mobile, Boost Mobile, Sprint and similar companies all benefit from large, captive audiences that are already using their products daily. Their customers are literally holding the phone in their hands. It’s tough to offer a more convenient platform than that. In less-developed countries such as Kenya, telephone-based asset transfer has already been successfully implemented. Retailers are also getting into the money-transfer business, with retail giant Wal-Mart offering a service of its own. With a large, global audience of loyal shoppers, Wal-Mart is targeting small-dollar asset transfers and has a significant customer base for building a new business.

The Shape of the Future

Digital currencies and virtual wallets are still in their infancies, but adoption rates are rising and the number of potential users is staggering. In the United States alone, 68 million people don’t have bank accounts or credit cards - but it’s a safe bet that most of them have phones. Mobile phone use in emerging-market nations also presents a huge opportunity, as high poverty rates and lack of banking infrastructure combine to create a notable opportunity for virtual banking. Even in more affluent countries, electronic payments, such as automated bill paying that links your bank account with your mobile phone provider or local electric utility, are already reducing paper currency use. These developments are signs of things to come, and it’s only a matter of time until new money-transfer technologies significantly disrupt the current methodologies.

The Bottom Line

So what do all these changes mean for Western Union? The firm continues to generate profits and deliver value for shareholders. While it faces fee compression from new competitors, the company isn’t sitting on its hands. Western Union continues to expand its existing network, invest in technology and acquire strategic businesses. The company also retains its title as a global leader in its field. While it’s hard to tell what the future will bring, Western Union’s long history of successful innovation and dominant market position suggest that the firm will make every effort to remain relevant long into the future. Of course, if just a small percentage of the potential audience decides to open a virtual wallet or transition to a virtual currency, companies offering these services will have success of their own.

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