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MoneyGram International, Inc. (NASDAQ:MGI)

Barclays Emerging Payments Forum Call

March 19, 2013 11:20 ET

Executives

Peter Ohser - SVP, U.S. and Canada

Eric Dutcher - VP, IR

Analysts

Unidentified Analyst

Unidentified Analyst

I think what we can do is get started right now. We will start off with the ARS question as the management team makes their way on the stage. But the question is, number one, what percentage of US population do you believe is under banks? Number one, approximately 10%; two, 20%; three, 30%; or 40% at number four?

Monica? 20%. Well we will find out if you guys agree with that at the moment, but why don't we first of all start off, thank you again for being here. We have the team for MoneyGram with us. Would it be -- I think it would be helpful maybe just start off introducing yourselves, and tell us a little bit about your backgrounds, and then we will get into some questions on MoneyGram and the under bank market.

Peter Ohser

Absolutely. My name is Peter Ohser, I am the Senior Vice President for the US and Canada, I am responsible for all the money transfer, bill payments, and our financial -- our paper products in the US and Canada for MoneyGram. Been with MoneyGram 12 years in a variety of different capacities.

Eric Dutcher

My name is Eric Dutcher, I am the Vice President of Investor Relations and I also work on strategy and M&A. I have been with MoneyGram for a year and a half and came formerly from private equity and Affiliated Computer Services.

Unidentified Analyst

Great. Well thanks again. I think what would be helpful, maybe we will start off with discussion and questions about the under bank market, which is really where this panel was meant to be. We will go into some specific questions on MoneyGram towards the latter part of the discussion, then open it up for questions. But starting off, I think just helping share your views on, really the size of the market. I know, we had a question on that, the audience thinks 20% or so, but how big is this market, what is the growth profile of the market in a sense of under bank and really, what trend do you expect, if any, over the next two to three years?

Peter Ohser

The size of the under bank market is, it's hard to measure and how you define kind of what is underbanked and we struggle frankly with the term a little bit, because there is lot of folks who have had bank accounts, they are in and out of bank accounts. But generally, it's 15% to 20% of the population we know that are in that, what you classified as the under banks. It is growing, as consumers are shifting into kind of non -- what kind of call, alternative financial services, right. So they are going to Walmart and they are cashing their check and they are doing transactional base types of activities.

They are being pushed out from the banks from high fees, and they just don't like there is a trust factor, that a lot of the consumers don't like. For most of these consumers, really, they are transactional. If you think about these consumers, they typically don't have large savings, they are living paycheck-to-paycheck and they use transactional services because it works for them, and if you offer them a bank account, even if it was very subsidized in a way, it may not still work for them. They really like that transactional based services.

Unidentified Analyst

Okay, when you think about serving that market, what are the different products that you could think of that, either MoneyGram or the market in general could offer, to help service that population?

Peter Ohser

Well, interestingly MoneyGram is obviously a money transfer company, predominantly, but 70% of money transfer customers are actually banked, and -- but the services are not readily available in banks at a competitive -- that have a competitive rate. So we find the bank consumers coming into these non-bank financial institutions to do these types of transactions.

Prepaid obviously is a huge story around how to service these customers, to give them additional tools to do transactions. But as you have seen with prepaid, I know Green Dot was in here, is that there is a tremendous amount of churn in these card portfolios. There is only maybe a 20% to 30% of these customers that are actually putting direct deposit on to these, because they really view these as disposable type transactional services. I want to get online, I have onetime use or a couple time use, and I use it, and then that's disposable, and at $4 or $5, it might be worth it too.

Unidentified Analyst

And when you think about the regulatory issues underlying in the market, just moving on there for a moment. Specifically in money transfer first, then we will talk about some of the prepaid side if you will. What are the actual latest regulatory things that we should all be aware of, with regards to money transfer? There is always different headlines that pop-up?

Peter Ohser

Well, Dodd Frank is the biggest regulatory environment coming under the CFPB and we don't know when that will come into effect, it was supposed to go in, in February of this year, and it has been pushed out and -- but they haven't actually announced when it will come out, but it's expected to come out somewhere in the second half of 2013. And that really is about disclosure, and for a company like MoneyGram, it's not a huge issue for us. We have already been very transparent in the disclosure components, but it does create a different consumer experience, needing to provide a lot of additional legalities and other information into consumers. But overall the regulatory environment, we don't -- we see it as pretty friendly.

Unidentified Analyst

I think that when we have seen some examples in the past year or two that, regulatory has actually had an impact also on more than just disclosures. We have seen pricing implications. At least for one of your big competitors, in some of the other markets, they are seeing pressure that regulatory has led to closing down certain operations and what not. I mean, is it having an impact on anything more than just disclosures, in the sense of maybe certain agents in certain markets, or are you guys really not seeing the same thing?

Peter Ohser

Well certainly compliance and the need to build robust compliance systems and investing in compliance is critical. So certainly, we feel that we have -- we spent more than $84 million in compliance systems over the last few years, and we will continue to invest in people and in systems. So compliance is certainly there, and it's a global reality, but it's ultimately something that is, from our perspective a competitive advantage as you build out a global scale.

Unidentified Analyst

It's absolutely a huge barrier of entry, right, in terms of other companies unable to get in. On that note, what I mean, we actually just work with another company, they just became public in this space, and it seems like that is (inaudible) one of the biggest barriers to entry for new emerging companies to try to get in. What does it take to really move from one market and to start off doing business as a money transfer business in a brand new send market? I mean, let's call -- I know in the US, you really have to get state-by-state license right, and approve?

Peter Ohser

In the US, it's state by state licensing and then any other market. Some countries, you typically have at the country level. It is a challenge to grow your market. I mean, the biggest challenge is really to build a brand. So to get a brand, that stands for trust and reliability, that is what people spend years and years trying to build in the money transfer. If you don't have that, you don't have a product.

Unidentified Analyst

Back to pricing again, I mean, I guess related to that. We have seen some pressure on the industry recently, and we (inaudible) some of the competitors, who have a better landscape. When you think of going into new markets again, some companies, including yourselves have among the best distribution of agents around the world. The best scale, another barrier to entry, beyond just regulatory. But I think also enables some premium pricing, that is [spanning] some corridors. Is that sustainable, I mean, can you talk a little bit about the pricing dynamics in the industry right now, because again, we have seen some of your competitors showing some change. How do you feel about that? I mean, is it something that should be an issue consistently?

Peter Ohser

I think it is sustainable. I think that from our perspective, it really comes down -- we talk about affordable, reliable and convenience. So affordable is a relative term, what is value, but typically, if you are within a dollar, or two dollars, that is not really a significant enough of a margin to change consumer behavior anymore. 10 years ago, when prices were $25 and consumers and some people were $10, that was a huge shift. A $2 difference is just not a huge component, the elasticity has kind of gotten to a floor level here, but it's not going to change the market dynamics that much.

But it comes down to do you have the right send agent? Do you have a good consumer experience on both the send side and the receive side? Do you have a large network? So our largest competitor in Mexico has probably 8,600 locations in Mexico. We have more than 15,000. Can I command a premium price because I add more convenience and more options for the consumer?

Unidentified Analyst

We have got different types of technology. We are at emerging payments conferences a lot, different technologies like mobility and mobile platforms that are coming to market. How does that help or maybe cause? Is there any concern around that or does that really help your model?

Peter Ohser

We think it helps and it just augments and is additive to our model. We have been in the online space for more than eight years and continue to grow that business, and that's more than a $50 million business and we grew that business 50% last year. So that's certainly something that we continue to invest and are growing, and we are working in conjunction with our agents to help with them, with their digital strategy. So we are embedding our systems into their own online platforms, and we are working on mobile applications and those things.

So we can send to mobile phones in the Philippines. We have launched in Qatar with Qtel, as their mobile money transmitter. So we have put out -- Gemalto has integrated our system in all of their core application system. So we really look at this as additive and we continue to partner to build that business up as consumers adopt it.

Unidentified Analyst

One of the questions we often get, is there any concern of some of the traditional players. Seeing customers that were traditionally offline cash customers moving online, and whether or not, that has an impact on your economics, right? I mean, is it a low revenue yielder or anything along those lines, for those types of customers online versus offline. Are you seeing that? Is that risk or is that just an opportunity, because they are stickier once they are online, going forward?

Peter Ohser

We actually have found that the consumers, there is a different consumer base between who is offline and online, but we also find that there is not anymore stickiness to the online consumer than there is to the offline. We have just as many people who do, that are repeat users, who are very loyal, and then we have a lot of folks who just come in and they want to do that one transaction and that's all they ever want to do.

But the margins on the online business are still probably slightly worse than the offline model today, but it's really due to scale and if people continue to invest in technology, fraud controls, and funding capabilities.

Unidentified Analyst

That was just about funding capabilities, is that something that you can see MoneyGram trying to figure out -- in terms of ACH funding really, is what I am comparing to. Is that something that can be figured out pretty quickly, or acquired or anything on those lines? I think you have some capabilities now. Do you have ACH real-time settlement for --?

Peter Ohser

We have always offered an ACH, but it was a standard kind of three to five day delivery, and we have had that for eight years; and consumers, by and large, shunned that product and always chose the credit and debit, and they still choose the credit and debit. We are offering, what we call a four-hour ACH, so it's not real-time, but we are offering this in conjunction we are working -- we are actually on walmart.com, you can do financial services right through the walmart.com, with MoneyGram.

Unidentified Analyst

It's pretty close to real time, I guess?

Peter Ohser

Four hours is a pretty good product. But I will tell you that the consumers again are choosing more of the credit and debit products, and there is a significant price differential.

Unidentified Analyst

For ACH, in other words, it's a lot cheaper?

Peter Ohser

It is lot cheaper.

Unidentified Analyst

Interesting. Well do you think it's just the trust factor, of using the card versus putting your account, your bank account online?

Peter Ohser

There is a trust factor. Consumers like real-time. The person may not pick it up for a day or two days, but by and large, they want to know they have access to their funds. These remittance funds are not something that are -- that you can plan and you want to put out there for a long time. There is a real time need for these money. So people like to be able to send these immediately, have the funds available to them. That's why, our 10 minute cash service is so popular.

Unidentified Analyst

Okay. When you think about alliances in the industry, there is a lot of other companies that try to either work with you, and partner with you, given your distribution capabilities and your scale and your regulatory knowhow, where do you see the path going, in the sense of working with the networks for instance, the card networks? I know you have some relationships now with Visa. Can you just talk a little bit about the relationships you have with the card, the other, and the rest of the payments ecosystem?

Peter Ohser

We have great partnerships with a lot of different partners and some of them are just kind of, they are continuing to work and find out what is the right solution. So for example, we can send any Visa card in Mexico today, and that's a great product. But in fairness, the consumers have not accepted it in great quantity, it's growing, but it's not taken off. But these are great partnerships that we continue to work with, Visa and other partners on. MoneyGram has 310,000 locations worldwide, and we really are, kind of think about it, experts in getting money in, and getting money out of, and so we really have an opportunity to be the funds-in, the funds-out model. So we are actually working with PayPal to become their funds-in and their funds-out. So you will be able to now go on to PayPal and get a funds-out at a MoneyGram location, and if anyone has ever tried to get money off of PayPal very quickly, it has been a significant challenge. With this, you will be able to go on, log and send that money right to and pick it up at a MoneyGram location.

Unidentified Analyst

That's interesting. Is there a difference in the sense of pricing using a PayPal transaction than there would be for?

Peter Ohser

It's a different service. We do a lot of variety of different services. Some of them are, we kind of call cash payout services. So it's really a money transfer to itself. So it's not a traditional remittance, and so the fee is a little bit different. So we do a lot of innovative things, where we do a lot of working with other businesses, and need to get funds out into the market, whether it's a payroll company or even a prepaid company who, somebody lost their card and they need to offload that balance, how do we get that fund? I don't have a card, I can't go to an ATM. So there is a lot of opportunities for us to leverage our cash-in and cash-out network.

Eric Dutcher

So strategically, we have got the network locations, but we also have this processing, the capability to go across borders. So as companies come into play, whether they'd be mobile or they are prepaid and see the opportunity of getting the revenue stream from money transfer. One of the advantages we have is, we can offer that service and the partnership, much at a less expensive rate than if they were to go out and try to build the capability there themselves. So this is really something that we are taking advantage of those strategic assets to those partners.

Unidentified Analyst

When you think about the overall market size now and just the opportunity for moving into other products or other opportunities internationally, let's say (inaudible) for instance. I mean, how is that as a pathway? Is that something that's doable in near term?

Peter Ohser

MoneyGram has taken a different approach with prepaid. We have a prepaid program, but we have not invested heavily in their own program. So rather, we have been working with all of the prepaid providers, in helping them become the reload network. To help we have done virtual agencies, so for example, many of you might be aware of NetSpend. On NetSpend, you can go on to their online transaction site and send a MoneyGram, Bill Pay or Money Transfer off of your cards from their NetSpend. So it's a virtual agency.

So we have actually, rather than compete and try to build out that capability, we have been working on a partnership approach with the industry.

Unidentified Analyst

Just last question and then we will open it up for other questions. When you think about the opportunity to really grow the market in general, first of all, what is the market growing by, we will just wrap it up with overall big picture questions. Money transfer market --?

Peter Ohser

Money transfer typically is measured on a dollar basis, cents, and it's in the mid-single digits.

Eric Dutcher

So for the CAGR that the World Bank has put out and we generally follow the World Bank estimates, that's probably the best estimate out there. The CAGR is about 8% growth and it has been growing every year, if you look back, the one exception was 2009. The market shrank 6%, but in that year, we grew 6%. So last year, 2012 was a decrease from where it had been in the past, the market grew 4%, MoneyGram grew 14%.

Unidentified Analyst

Okay, and what is the opportunity, what's driving that growth? I mean, it is more migrants, is it more demand for more employment? What exactly are the lines drivers that's letting that happen?

Peter Ohser

Absolutely, it's immigration. It's people moving. It's people seeking opportunity across the world wherever there are jobs, and historically it was -- you saw a lot of opportunities to -- it was always kind of North-South, rich-poor countries where you saw these, and now you are starting to see much more of what we call south-to-south remittances. So intra-LAC, intra-Africa, these are markets that are growing significantly and as people move, and we are well positioned to take advantage of that.

Unidentified Analyst

And should MoneyGram grow better at a faster pace or gain market share?

Peter Ohser

Absolutely. We have been consistently.

Unidentified Analyst

What is the driver of that? Is it just -- its not pricing you said, it's mostly --?

Peter Ohser

It's not pricing. Our pricing has historically been very stable. It's really about adding our distribution and its growing our network. We continue to grow our network. I think we have grown consistently 15% to 20% over the last few years, every year, and it's also about building our brand, right. So the biggest challenge is building our brand. We operate in 197 countries. So we have credible brand here in the US and in Canada. We are right at parity with our leading competitors, but there are other markets where we are continuing to invest, because we have to build our brand.

Unidentified Analyst

Okay. So any questions in the audience, we'd be happy to take now. But when we think about the opportunities across the border, there has been, like I said earlier, coming back to pricing, because obviously, that has been stirring up a lot of questions in the industry recently. You have been able to grow well without changing pricing, so it has got to be something around your brand, obviously your breadth and your offerings. Again, just to reiterate, for a lot of investors that have asked me this question, you don't expect to see a material change in that strategy though, I mean, in sense of pricing dynamics or yourselves?

Peter Ohser

We are vigilant on watching the market and paying attention. We've just not felt the need at this point to change our pricing strategy.

Eric Dutcher

And we wanted to make sure that everyone was kind of where we are today, and during our fourth quarter call, we had preannounced our January results, with 14% transaction growth, and 12% revenue growth. So we are doing very well. We created guidance that takes into account, as potentially having to take other price actions. We basically are sitting [math] ready and we will respond as we need to. But at this point, other than the price changes we implemented at Walmart, we haven't had to make any other changes in our network.

Question-and-Answer Session

Unidentified Analyst

Great, well is there any questions in the audience, we'd be happy to take now? Okay, if not, why don't we start the ARS -- go ahead Adam.

Unidentified Analyst

I just want to circle back to the regulatory issue that you brought up for -- if we go back five or six years ago, I think probably the consensus thesis on the increased regulatory actions was that, that would build the barriers to entry and create scale benefits with the $80 million for the spend and we have got a very fragmented industry and that would allow the share to consolidate a little bit in form of pricing, and it just feels like that thesis has been very wrong, and a lot of the regulations have -- actually that gun has been pointed at the big incumbents, rather than the (inaudible). Curious if you see any sort of change in the landscape on that, so that original thesis might be true some day or as such, (inaudible).

Peter Ohser

I don't see a change at this point. I think that we are hopeful with Dodd Frank and just as greater scrutiny comes in on overall players, we have been told that that all players would be given similar scrutiny. But certainly regulators are going to make an example out of the larger players if they can, and I don't think they have done that, and I think we are certainly looking to move beyond that. But compliance is paramount for so many levels, but a lot of it is around -- when you talk to an agent and you are trying to solicit a large national retailer, one of their first questions is around compliance? I mean, there is a significant scrutiny and understanding around the compliance, what is this going to put me at risk for, but whether how are you going to help me to build my business, and to be able to take out some of that burden, and that's where the smaller players will never be able to provide that service.

Unidentified Analyst

Great, any other questions. Great, (inaudible) ask questions is about five minutes before the lunch session. So if we can start now, it'd be great. In your view, which type of households has the greatest percentage of under bank? Number one, household experiencing unemployment? Number two, foreign born non-citizens? Number three, lower income households? Number four, families with households in low 20s? After we get the answers, we will look to hear your thoughts.

It's a tie. Foreign born non-citizens, lower income. Is that?

Peter Ohser

Well yeah, it's consistent with what we have seen. About 50% of foreign born non-citizens are -- actually foreign born, in general, are underbanked or unbanked.

Unidentified Analyst

Got it. Great, all right. Number two, in your opinion, what financial products are underbanked? Customers more likely to use prepaid cards, non-bank money orders, payday loans, non-bank check cashing?

Unidentified Analyst

Maybe add bill payment

Unidentified Analyst

That's probably right. Non-bank check cashing, which is very consistent with your --?

Peter Ohser

Yeah, very consistent. You know, money orders is actually, we still do a lot of money orders, and as people pay the rent with money orders, that's by and large, the largest component. But we have been partnering with payment manager or property managers to be able to pay electronically through those. So it’s a huge growth market for us, as we cannibalize our own paper products.

Unidentified Analyst

All right. Last question, which geographic corridor receives the greatest remittance volume from underbanked customers? Mexico, India, China, or the Philippines? Through the [medium] of the send market, right? Yeah, so Mexico is the number one answer, followed by India, is that about right?

Peter Ohser

Yeah, I think that's right.

Unidentified Analyst

For the US specifically, yeah.

Peter Ohser

Yeah for the US, absolutely and pretty much on a global basis. So, India is heavy, there is dichotomy here in the US between kind of the labor kind of Indian and then the kind of high-tech Indians who also send a fair amount of money. But on a global basis, there is a lot -- from the Middle East, a lot of imported labor that is sending, that's much more unbanked.

Unidentified Analyst

Okay. All right. Well listen, thank you both for being here, and we really appreciate your time. We have about three to four minutes before the lunch presentation is the key note with Barclaycard CEO. But again, thank you both.

Peter Ohser

My pleasure, thanks.

Eric Dutcher

Yup.

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