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Moving people, moving money: Western Union and the remittance market
In July 2013, Barclays, one of the UK’s largest retail banks, announced its decision to close the accounts of money transfer companies, which allow customers in one country to receive funds locally from a sender in a different country. The reason given by Barclays was that some of these companies had insufficient checks in place to prevent the transfer of funds to terrorists and other criminals.
However, the resulting outcry revealed just how vital such remittance services are for many people in the developing world. A petition to the UK government urging that Barclays reconsider attracted 20,000 signatures. Somalia-born Olympic champion Mo Farah described the decision as “a disaster for millions” in his native country, which has no functioning banking system.
Whether or not Barclays reverses its decision, there is no doubt that the remittance market will continue to grow, and one of the major beneficiaries will be Western Union. This US-based company was established in the mid-19th century as a telegram service pioneer, and began fund transfer operations as early as 1871. A brief excursion into voice telephony was ended due to a patent dispute, and from then on its business could best be described as data telecommunications. The company transmitted its last telegram in 2006, thereafter focusing on fund transfer.
Modern banking systems mean that demand for its services within countries like the US is relatively limited. However, international transfers are another matter. In 2012, transfers between private individuals accounted for 81% of its revenue, and of this, the majority was generated by transfers where one or both parties were located outside the US.
Globalization is a key driver. World Bank figures show that net migration is leading to a transfer of people from Africa, Asia-Pacific, and non-US Americas to the US and Western Europe. The numbers involved in 2010 were significantly higher than in 1990. The net flow of remittances is, of course, in the opposite direction. As migration from developed economies increases, more funds are sent back to the families of migrants who remain in their developing-economy countries. In 2012, total remittance volume globally was around $400bn.
To capture its (sizeable) share of this market, Western Union has a network of local branch offices in many countries, usually operated on a third-party basis. Over the past decade, the number of its offices has increased ten-fold. It also offers online and mobile phone money transfer services.
The company is not immune to the costs of regulatory compliance, including anti-money laundering and fraud prevention, which in 2012 amounted to $100m. It also faces competition from service providers such as PayPal.
But with 2012 net income of more than $1bn, equating to 18% of revenue, it is currently showing that its single-minded focus on fund transfer is yielding strong results. With no sign of a slowdown in economic migration and remittance volume, this success is likely to continue.