Networks: Trying To Stay on Top

Jane Adler

Facing pricing pressures from new competitors in their traditional business, the wire-transfer companies are seeking new growth opportunities.

New technology is highly disruptive to established markets, and the payments business is no exception.

Consider recent developments in the traditional wire-transfer business. As technology and consumer demand change the market for financial services, especially with the growth of person-to-person payments, the wire-transfer companies are jockeying for position and seeking new growth opportunities.

Leading U.S. players The Western Union Co. and MoneyGram International Inc., along with a host of smaller rivals, are rolling out new initiatives to capture a slice of the mobile-payments market. At the same time, the remittance companies are beefing up their bill-payment and prepaid card businesses as new competition in the traditional cash-transfer segment squeezes margins.

New regulations also could affect the business since remittance rules that govern financial institutions will soon require additional transparency.

The big wire-transfer players have internal issues too. MoneyGram recently agreed to a $100 million settlement with the U.S. Department of Justice over allegations of fraud by some of its U.S. and Canadian agents. Western Union announced in October that Stewart Stockdale, president of global financial services, had left after the company eliminated a management layer.

“The money-transfer companies face a challenging environment,” says Gwenn Bézard, co-founder and research director at Boston-based Aite Group LLC, adding, “They have to figure out how to grow.”

Competition from P2P

Industry analysts agree the money-transfer companies have one big advantage: the ability to provide actual cash. Though payment cards and other means of electronic payment are displacing many cash transactions, this ancient form of payment is not going away any time soon. About 30% of U.S. payments are still made in cash, according to a recent report by the Federal Reserve Bank of Boston.

The wire-transfer companies have massive global networks of agent locations that can distribute cash, often the preferred payment type in many foreign markets. A November report by the World Bank projected worldwide remittances to total $534 billion in 2012, reaching $685 billion by 2015. The top recipient countries of remittances in 2012 were India, China, the Philippines, Mexico, and Nigeria.

Although it boasts many small companies, just a few firms currently dominate the money-transfer business. World leader Western Union, based in Englewood, Colo., and Dallas-based MoneyGram, which is No. 3 globally, handled money transfers of $88.5 billion in 2011, comprising 21.3% of the total remittance market, according to a February 2012 report by Aite.

Other major players are UAE Exchange, which is based in the United Arab Emirates and ranks No. 2 globally after Western Union, according to Aite, and India’s ICICI Bank. Notable U.S. companies in the market include DolEx Dollar Express Inc. and money-center bank Wells Fargo & Co.

New companies are being drawn into the money-transfer market as non-exclusive agent contracts become more common, the Aite report says. As a result, competition is growing while prices and margins are shrinking.

Even more competition is coming from new forms of person-to-person payment. Checks and cash still dominate P2P payments, estimated at about $1 trillion annually. But electronic P2P payments now account for about $80 billion to $100 billion in transactions annually, according to First Annapolis Consulting Inc., Linthicum, Md. Consumers can now use their computers and smart phones to transfer money, instead of sending a check or visiting a wire-transfer agent.

The majority of electronic P2P payments currently are conducted via computer. But Paul Grill, a partner at First Annapolis, says: “The growth will be in phone-based transactions.”

Mobile Transfers

Not surprisingly, mobile offerings are now a high priority of money-transfer providers, including financial institutions, non-bank participants such as PayPal Inc., and the traditional wire-transfer companies. In October, MoneyGram announced a new partnership with PayPal. Consumers will be able to deposit or withdraw cash from their PayPal account at a MoneyGram location.

“This provides consumers with a comprehensive digital wallet,” says Dan Schatt, head of financial innovations at PayPal, San Jose, Calif. He explains that other P2P payments technologies don’t have a way to handle cash. The venture with MoneyGram, which declined to talk to Digital Transactions, solves that problem.

PayPal customers will have three ways to use the MoneyGram option. They can deposit cash at a MoneyGram agent location into a PayPal account that they can then use to shop online instantly. Consumers can also deposit cash into another person’s PayPal account. Or PayPal customers can withdraw cash from their account at a MoneyGram location.

The service isn’t available yet, but a pilot program is set to be rolled out during 2013’s first quarter, says Schatt. The pilot will likely be launched in California and Texas, the home bases of PayPal and MoneyGram, though those details hadn’t been confirmed as of late November. The program will be expanded to more U.S. locations throughout 2013. Schatt expects the service to be available in five countries by year’s end.

PayPal also is conducting a pilot with Bellevue, Wash.-based Coinstar Inc. That company, which owns the Redbox DVD-rental business, has 19,000 kiosks at supermarkets and mass merchants where consumers can convert coins into paper money, or use cash to reload Green Dot Corp. prepaid cards.

The pilot, being run in Dallas, allows consumers to deposit cash at a Coinstar machine into a PayPal account or make a cash withdrawal. The test will be expanded in this quarter and gradually rolled out nationwide, says Schatt.

The Coinstar and MoneyGram locations will give PayPal customers access to 70,000 locations where they can manage cash, notes Schatt, a network that he says competes with ATMs. Pricing for MoneyGram/PayPal transactions hasn’t been set yet. Under the Coinstar pilot, consumers pay a flat fee of $3 to withdraw up to $500 from a PayPal account.

“We expect pricing to be disruptive to the prepaid industry as well as to the money-transfer industry,” says Schatt. “It’s highly competitive.”

Price Pressure

The wire-transfer leaders already are feeling disruption. MoneyGram noted in its third-quarter 2012 financial results that industry discounting is occurring in the online space. Chief financial officer Alex Holmes said in a conference call that MoneyGram had to make price adjustments in transfer fees to the Philippines, Mexico, and India as some competitors offered free services.

In another sign of growing price competition, Western Union introduced new pricing in November for money transfers originating in the U.S. Consumers can now send up to $1,000 to Mexico, Central America, Dominican Republic, and most of South America for only $8 from agent locations or online. More fee reductions and special promotions are expected throughout the year.

In an Oct. 30 conference call with investors, Western Union chief executive Hikmet Ersek said he expects the company’s “pricing investment” in 2013 to be in the mid-single-digit range as a percent of revenues, compared to 1% in both 2011 and 2012. “Pricing investments” are promotions and lower fees in certain corridors—the U.S. to Mexico, for example.

Western Union should be able to capture more market share by lowering prices, but the company also expects its digital products to continue to grow quickly. Third-quarter revenue from digital channels increased 25% from the previous year. The digital segment accounts for 4% of Western Union’s total revenue.

Western Union now has an online platform in 23 countries to send cash. In May 2011, the company introduced a mobile application so consumers can initiate a money transfer with a smart phone. Customers can send money to a bank account in 40 countries.

Further, Western Union is working with telecommunications companies in developing countries. In a typical arrangement, virtual accounts are linked to a cell phone, and Western Union allows customers to make deposits to the accounts. The company has 15 operations up and running, including a deal in Kenya with M-Pesa (for mobile money), a cellular money-transfer service. Twelve million customers have been signed up in three years.

“We follow our customers, and they’re making the leap to digital,” says Khalid Fellahi, senior vice president and general manager of Western Union Digital, San Francisco.

Recently, MoneyGram entered into an agreement with digital-security company Gemalto NV that enables money transfers to be sent and received via mobile phones. And last March, MoneyGram struck a deal with bank processor Fiserv Inc. under which MoneyGram’s services will be added to Fiserv’s Popmoney P2P payments product.

Financial institutions using Popmoney’s network will be able to offer consumers the ability to send or receive funds at MoneyGram locations. No date has been announced for the rollout of the service, according to Tom Roberts, senior vice president marketing at the CashEdge division of Fiserv in Norcross, Ga.

Fiserv in September 2011 bought Popmoney developer CashEdge Inc. and last June combined Popmoney with its own ZashPay P2P service. Fiserv in November counted 1,700 financial institutions as P2P service clients, up about 300 since June, with a reach of 40 million online-banking consumers.

“Our usage is growing exponentially,” says Roberts.

Consumer use is growing for paying formal household bills, such as shared rent payments, Roberts says. Fiserv also has a mobile-banking solution called Mobiliti.

Meanwhile, innovative tech companies such as Xoom Corp., with its online wire-transfer model, are challenging the traditional agent-location business model. Even Facebook could enter the payments business, industry watchers say.

‘Major Growth Strategies’

So do the electronic P2P payments providers and banks represent a serious threat to the traditional wire-transfer companies today? Not yet, but as more competitors emerge, “There will be more price pressure,” says Beth Robertson, director of payments research, Javelin Strategy & Research, Pleasanton, Calif. And, she adds, money transfer is one of the business opportunities payments companies are sure to explore.

Already, three megabanks—JPMorgan Chase & Co., Wells Fargo, and Bank of America Corp.—are offering a money-transfer service called clearXchange. Each bank’s customers can transfer money from their bank account to another customer’s account.

Complicating matters, though, are new regulations from the Dodd-Frank financial reform law due to take effect Feb. 7, which will require financial institutions to disclose various fees, taxes, and currency rates. In October, J. P. Morgan Treasury Services announced that it would provide a new solution to banks to meet the compliance standards.

With the competitive landscape changing rapidly, the traditional wire-transfer companies are expanding their other businesses. One natural growth market is prepaid cards, which are popular with the lower-income consumers and immigrants who form major customer segments of the wire-transfer companies.

In August, Atlanta-based DolEx Dollar Express entered into an agreement with prepaid card program manager NetSpend Holdings Inc. to sell general-purpose reloadable prepaid cards. The cards are available at DolEx’s 550 company-owned stores.

Western Union announced in November that its prepaid, or stored-value, cards would be available at more than 7,400 Family Dollar stores. Western Union’s prepaid cards also are available in Dollar General and 7-Eleven stores. Consumers can enroll online too.

“Stored-value cards are one of our major growth strategies,” says Mark Ruthven, director of global stored-value business at Western Union.

The company’s stored-value revenue grew 9% in the third quarter compared to the year prior. Most of the revenue comes from interchange fees, Ruthven adds. Card reloads are $4.95 for up to $950 at a Western Union location. It costs $1 to reload a card online by bank transfer. Some funds can be loaded for free, such as payroll deposits and federal government benefits.

‘A Lot of Convergence’

Though the bulk of Western Union’s stored-value business is U.S.-based, the company offers prepaid products in 12 countries. Western Union introduced prepaid cards to the Philippines in June, and to India in October. Consumers can have regular remittances loaded onto a prepaid card, instead of picking up cash. Western Union also offers the service in El Salvador and plans call for further expansion in Central America.

In addition, Western Union is beefing up its bill-pay service. The company announced in November that it had reached a milestone of 15,000 billers in its U.S. walk-in payments network. In 2011, the company handled 425 million payments—either in-person, online, or via a mobile device.

“The consumer migration is towards electronic payments,” notes David Shapiro, senior vice president of payment services at Western Union.

Western Union has a mobile application where customers can check their bills and payments. Consumers can also enroll for a service to receive a text and pay a bill when it’s due.

Meanwhile, bill payments through MoneyGram’s MoneyGram Online service are growing. Self-service and new channel revenue at MoneyGram Online grew 40% over the prior year, representing 5% of total transfer revenue, according to a company report.

For now, the business model of the traditional wire-transfer companies is safe, says Aite’s Bézard. But the challenge will be to find new ways to grow, probably by integrating with the mobile payments networks.

“We’re going to see a lot of convergence,” he says.