Wal-Mart's New Money Transfer Service Is Not A Major Threat To Western Union

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Unlike Western Union, Wal-Mart's new money transfer offering is a national service, not a global one.

There are significant barriers to taking Wal-Mart's new service beyond the shores of the United States.

Wal-Mart's new service is just the latest in a series of perceived threats to Western Union that are overblown.

Wal-Mart's Big Announcement

Wal-Mart (NYSE:WMT) has announced the launch of a new service that will allow customers to transfer money store-to-store at a much lower cost than is currently available with most money transfer alternatives:

BENTONVILLE, Ark. - April 17, 2014 - Millions of customers transfer money domestically each year, many of them struggling to navigate the complex and costly fees that come with each transaction. Today, Wal-Mart and Ria are launching a retail industry first - Wal-Mart-2-Wal-Mart Money Transfer Service. Available April 24, the new low-cost service allows customers to transfer money to and from more than 4,000 Wal-Mart stores nationwide for up to 50 percent less than similar offerings on the market.

"After listening to our customers complain about the high fees and confusion associated with transferring money, we knew there had to be a solution," said Daniel Eckert, senior vice president of services for Wal-Mart U.S. "Wal-Mart-2-Wal-Mart brings new competition and transparent, everyday low prices to a market that has become complicated and costly for our customers. We're doing what we do best - launching a new service that challenges the status quo and drives down prices for our customers."

In the wake of the announcement, stocks of money transfer companies took a predictable hit. Western Union (NYSE:WU) was down nearly 5%, Xoom (NASDAQ:XOOM) was down over 4%, and MoneyGram (NYSE:MGI) was down a staggering 17%. The disproportionate drop in MoneyGram is probably a result of the fact that MGI transfers are currently available in Wal-Mart stores, and so that company may be more directly affected than other money transfer services by this latest development.

The drop in money transfer stocks was predictable because any time a new money transfer service is unveiled or gains a certain level of acceptance in the world, it seems to spark fears in the minds of some that companies like Western Union have become more or less obsolete overnight. This line of thinking goes something like this: the technology to facilitate ultra cheap global money transfers exists already, and it's only a matter of time before someone harnesses this technology in a way that makes services that charge fees for money transfer immediately obsolete.

And yet, most of the new services that have supposedly been harbingers of Western Union's imminent demise have proved not to be. Companies like PayPal and Xoom, and technologies like Bitcoin make global transactions possible and even they have not been able to knock Western Union off its perch. The new Wal-Mart service is in several key respects a much less ambitious service than any of the others mentioned in this paragraph, and for the reasons set forth below, I do not believe that Wal-Mart will be able to do what PayPal, Bitcoin, Xoom, and others failed to do. I do not believe that Wal-Mart's new service poses a significant threat to Western Union.

Wal-Mart Intends to Operate in Only a Corner of Western Union's Backyard

In theory, the advent of a substantially cheaper money transfer alternative poses some obvious challenges to established money transfer companies like Western Union. However, those who are especially worried about Wal-Mart's entrance into this crowded field seem to have overlooked one very important fact: Wal-Mart's new service will facilitate transfers of money only within the United States, not internationally.

The significance of this fact cannot be overstated. While Wal-Mart's service will be available in one country, according to its latest 10-K, Western Union's is available in over 200 countries and territories, and roughly 90% of its locations are outside of the United States.

Furthermore, consumer-to-consumer transactions in North America account for only 19% of Western Union's consolidated revenue. It seems unlikely that the prospect of saving a few dollars on a money transfer transaction will lure vast numbers of new customers to Wal-Mart stores, and so the bite that Wal-Mart's new service takes out of the 19% of Western Union's revenue attributable to North America seems likely to amount to little more than a corner of Western Union's backyard.

Regulatory Compliance Costs Are a Significant Barrier to Wal-Mart's Expansion into Other Countries

It also seems unlikely that Wal-Mart's new service will expand too far beyond the United States. One of the major components of Western Union's moat is the enormous regulatory compliance costs that a money transfer service that aspires to be truly global in reach must contend with. As Western Union's most recent 10-K notes, there are compliance costs associated with expanding into even a single new country:

Outside of the United States, our money transfer business is subject to some form of regulation in all of the countries and territories in which we offer those services. These laws and regulations may include limitations on what types of entities may offer money transfer services, agent registration requirements, limitations on the amount of principal that can be sent into or out of a country, limitations on the number of money transfers that may be sent or received by a consumer and controls on the rates of exchange between currencies. They also include laws and regulations intended to detect and prevent money laundering or terrorist financing, including obligations to collect and maintain information about consumers, recordkeeping, reporting and due diligence, and supervision of agents and sub-agents similar to and in some cases exceeding those required under the BSA. In most countries, either we or our agents are required to obtain licenses or to register with a government authority in order to offer money transfer services.

The report goes on to note that these costs are increasing, not decreasing:

Regulators worldwide are exercising heightened supervision of money transfer providers and requiring increasing efforts to ensure compliance. As a result, we are experiencing increasing compliance costs related to customer, agent, and subagent due diligence, verification, transaction approval, disclosure, and reporting requirements, along with other requirements that have had and will continue to have a negative impact on our business, financial condition, and results of operations.

While these increased compliance costs are obviously a drag on the company's performance, they are also a strong barrier to entry for other players, like Wal-Mart, who might otherwise be tempted to expand the reach of their services beyond the United States. Put differently, while the technology to facilitate ultra cheap global money transfers may exist, the legal framework in which those transfers must be made is one of increasing complexity and one that imposes increasing costs on those who operate in this space. This fact will likely impose a floor on the pricing of global money transfers in the future.

Therefore, it is not surprising to learn that Wal-Mart launched a national rather than a global money transfer service. Indeed, analysts seem to think that the reason Wal-Mart created the new service has nothing to do with creating a global money transfer service, and everything to do with the much more modest goal of keeping people in their stores. Take, for example, this remark by one analyst recounted in a recent Forbes article on the subject:

"If customers are able to make financial transactions in a Wal-Mart store, then they're more likely to stay and buy something too. Wal-Mart wants you to cash your check there, pay your bills there, send your money to family there and shop," Jackson says. " This is Wal-Mart saying, 'Don't leave my store,'" he adds.

Is it possible that Wal-Mart might eventually expand the new service beyond the United States? Of course it is. But there are significant costs associated with doing so, and therefore, any expansion is likely to be slow and piecemeal and is not likely to present a significant challenge to the global reach of Western Union.

Western Union Looks Like a Solid Investment for the Long Term

Once one is satisfied that money transfer companies do in fact have a future, Western Union appears to be the best stock of the lot.

As an initial matter, it is the cheapest of the three companies discussed in this article with a P/E ratio of around 10.7. Even after its plunge last Thursday, MGI still has a P/E ratio above 20 and XOOM's is north of 110.

Furthermore, WU dominates the space, with roughly four times the revenue of MGI and 45 times that of XOOM. It also has the highest operating margin of any of the three at 20%, compared with 12% and 9% for MGI and XOOM, respectively, giving it a greater ability to withstand pricing pressures from new competitors like Wal-Mart.

While MGI and XOOM have been increasing the number of outstanding shares, WU has been steadily reducing that number for years. Simultaneously, while neither MGI nor XOOM pay a dividend, WU has been increasing its dividend for 5 straight years, although the payout still sits at an extremely low 35%.

For those interested in reading more about the long case for WU, I highly recommend this article by fellow Seeking Alpha contributor Brian Erskine.


It is popular these days to announce new harbingers of the imminent death of Western Union. If it isn't PayPal, it's Xoom or Bitcoin. The latest supposed harbinger is Wal-Mart. In my opinion, fears about the potential for Wal-Mart's new service to harm Western Union are as overblown as fears about PayPal and Bitcoin have been. Western Union remains a relatively cheap stock with a consistently rising dividend and a low payout ratio, and I think it's one to hold for the long term.

Disclosure: I am long WU. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I'm a DIY investor and not a financial professional, broker, or securities dealer. My articles and comments express my own thoughts and opinions and nothing more. You should always seek qualified advice pertaining to your own unique situation before investing your money.