- Western Union looking to buy MoneyGram, reports Bloomberg
- Shares in both money transfer firms are soaring on news
- Money transfer business risks include competition, remittance fee cuts, COVID-19
Western Union, the largest and most recognized money mover in the world, has made a takeover offer for smaller rival MoneyGram, according to a new Bloomberg report. Both firms provide money transfer services to people and companies, and investors are blessing the union by sending shares surging. Western Union stock is up 12% and MoneyGram shares are almost 50% higher. China's Ant Financial Services Group had planned to buy MoneyGram for $1.2 billion but the deal was blocked in Jan. 2018 by the U.S. government citing national security concerns.
Traditional money transfer providers have been struggling lately as the growing crop of fintech companies, like the highly successful TransferWise, offer easy and cheap online payments, and policy makers look to cut transfer fees. Crypto projects like Facebook's Libra and its competitor Celo may also pose a risk in the future. "We are in the dial-up days of internet money," said Katie Haun, a general partner at Andreessen Horowitz who co-manages a $515 million fund for investing in cryptocurrencies and blockchain projects, to Bloomberg. MoneyGram is currently partnered with Ripple to use its On-Demand Liquidity product that leverages the digital asset XRP for cross-border settlements. The enterprise blockchain company has invested $50 million in MoneyGram for 9.95% of common stock and approximately 15% on a fully-diluted basis including non-voting warrants held by Ripple.
"We have experienced increased competition in money transfers sent and received within the United States from competitors that do not charge a fee to send or receive money through bank accounts. The potential international expansion of these competitors could represent significant competition to us," said Western Union in its February 2020 10K SEC filing. It also listed consumer advocacy groups that may see migrants as disadvantaged or entitled to protection as a risk. The global average cost for sending remittances has also been falling. It is now at 6.79%, down from 9.67% in Q1 2009, according to The World Bank. Cost varies based on where money is being sent to and method. Banks are the most expensive providers, followed by post offices and money transfer operators, with mobile operators being the cheapest.
Consumer and commercial activity has slowed and physical locations were forced to close during the pandemic, impacting the money transfer business. Global remittances, something Western Union calls "a core part" of its business, are set to drop drastically this year as economies in the West experience a recession. Yesterday Citi estimated that the amount migrants send home could fall by $100 billion in the worse case scenario. World Bank expects it to fall 20% or $142 billion from last year to $445 billion, the sharpest decline since records began in 1980.