Western Union Shares Slide on News of Paypal-Xoom Deal

Shares of the money transfer leader Western Union Co. WU plunged 6.9% to close at $18.99 in the last trading session, after the news that PayPal will acquire Xoom Corporation XOOM for $890 million became viral.

Though Western Union is a leader with a 15% share of the $586 billion global remittance market and around 500,000 agent locations in approximately 200 countries, the PayPal-Xoom combination would pose serious competitive threats to Western Union's digital business.  

Launched in 2001, Xoom is one of the pioneers in digital money transfer business and PayPal makes the most of its revenues from online purchases. Both these players have a niche presence in the digital money transfer market where Western Union is still developing.

We also fear cannibalization of the company's revenues which charges premium pricing in the industry. Given its brand name, reliability and a near monopoly in the market, customers have so long paid the charges without asking questions. But the emergence of other fast, reliable secure, flexible and most importantly low cost ways of remittance will make customers drift away.  

Nurturing its Digital Business

Western Union which originally transferred money – its core business – via brick and mortar outlets, underwent a digital transformation to combat growing competition from prepaid cards, Internet-based transfers and mobile phone payments. In order to ensure a smooth transformation, the company hired a new CIO, high-tech industry veteran David Thompson, in early 2012.

Western Union's digital business generated $250 million of revenues or 4.5% of total revenues from weternunion.com (C2C and C2B) and mobile money transfer. WU.com (which brought in 7% of total revenues in first-quarter 2015) is currently available in 25 send markets, and this number is expected to increase materially by this year end.

Digital Revolution to Continue

The widespread use of technology has filtered down to the financial services industry and has redefined the payments method from analogue to digital. Internet is now a way of life and electronic payment is preferred for transferring money. Digital transactions seem more attractive owing to the cutting edge technology used for improved customer service, security, and flexibility at a lower cost.

Players are eager to cash in on the booming digital remittance industry which is growing at 4–5 times the overall industry growth which in turn expected to grow 4–5% in the coming years according to World Bank.  

Consolidation on Cards

The thriving money transfer industry is expected to see a significant change in its landscape with the proliferation of mobile devices and Internet connectivity. New companies with innovative money transfer solutions are thus sprouting. These tech-savvy players such as M-Pesa, TransferWise, WeSwap, PeerTransfer WirldRemit and Remitly hold only a small share of the money transfer industry, lack size and the global interoperability of Western Union. Yet a likely consolidation among them can give birth to a mega company in the space, thus creating significant competitive pressure.  

Other Headwinds Faced by the Company

Apart from growing competitive pressure, Western Union is also facing stiff regulation. Management estimates that compliance costs will represent 3.4% to 4.0% of revenues in 2015 compared with 3.3% in 2014. These compliance initiatives could pressure revenue growth by 1–2%.

Foreign exchange headwinds are also likely to impose charges of $300 million this year.

Way Ahead

In May, there were rumors about Western Union acquiring Moneygram International Inc.MGI. But the company issued a press release on May 6 rubbishing the media reports. We expect the company to look for strategic acquisitions for expanding geographic presence, as well as for adding capabilities within mobile and account-to-account business. Also, we expect the company to ramp up its investments in its digital platform, which should not only help to offset competitive pressure, but steadily grow its customer base as well.

Western Union carries a Zacks Rank #3 (Hold). A better ranked stock is Global Payments Inc. GPN. The stock carries a Zacks Rank # 2 (Buy).

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