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How Amazon and Google are helping Western Union fight the multibillion-dollar fintech threat

Key Points
  • The 168-year-old Western Union is the leader in international money transfers, generating revenue of $5.5 billion in 2018 and doing business with Amazon and Google.
  • Western Union executives also have embraced the shift to digital transactions to help compete against the onslaught of rivals like TransferWise and WorldRemit.
  • Last week Western Union announced a partnership with TechStars, a proven start-up accelerator, to nurture 10 early-stage start-ups in next-generation payment technology and cross-border money movement.
Ben Hider | Getty Images Entertainment | Getty Images

You don't get to celebrate your 168th birthday by standing in place. Consider the company that started out in 1851 as the New York and Mississippi Valley Printing Telegraph Co. More than a century and a half later, Denver-based Western Union is the leader in international money transfers, generating revenue of $5.5 billion in 2018 and doing business with tech giants Amazon and Google.

"You have to have the courage to disrupt yourself before you're disrupted by somebody else," says Rebecca Loevenguth, vice president of transformation at Western Union. "It's in our DNA."

Change has been the mantra at Western Union since its early days as a provider of telegraph services. It bought up incompatible competitors and created the first transcontinental communications network. Payments by "telegraphic money exchange" soon followed. Although it passed up an opportunity to buy up Alexander Graham Bell's newfangled telephone, Western Union stayed on the cutting edge of technology. The company set up an intercity fax network, replaced telegraph operators with teletype machines, created a system of microwave towers and launched the first domestic communications satellite system. And we shouldn't forget the singing telegram and Candygram.

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The last Western Union telegram went out in 2006, and the company is primarily known today for its payments business, which moved $300 billion last year. Western Union faces stiff competition from rival MoneyGram as well as digital payment start-ups like TransferWise, which had a recent reported valuation of $3.7 billion, and WorldRemit, which in May landed a $175 million round of funding from TCV, Accel and Leapfrog, according to Techcrunch.

The upstarts have capitalized on a key technology shift: the widespread use of smartphones and the emergence of the mobile wallet, which makes a bank account or a cash payout counter less essential for a lot of customers. In just seven years TransferWise has become a major player in the remittance market, transferring $5 billion a month.

All these players are vying for a piece of the remittance market — money sent across borders between individuals— estimated by the World Bank at $689 billion in 2018, up 8.8% from 2017. The start-ups have focused on all-digital transactions, money moved electronically between bank accounts and increasingly to mobile devices.

Western Union has long been known for its extensive network of physical payment locations, where senders and receivers can bring or collect cash. The company has 550,000 agents in 200 countries via both standalone stores and alliances with retailers. It continues to expand its physical reach. In April it announced a partnership with discount store chain Dollar General to enable customers to send or receive payments at 15,400 outlets in 44 U.S. states. While it continues to reinforce its domestic presence, the majority of Western Union's business is international: $3.14 billion vs. $2.12 billion in the U.S. in 2018.

The TransferWise application seen displayed on a Android smartphone. (Photo byvia Getty Images)
Guillaume Payen/SOPA Images| LightRocket | Getty Images

Western Union executives also have embraced the shift to digital transactions to help compete against the onslaught of rivals like TransferWise and WorldRemit. In 2011, CEO Hikmet Ersek asked Moroccan-born Khalid Fellahi, who was running Western Union's Africa operations, to take on the task of building out the company's digital business.

"We decided it would take too much time to build everything internally," said Fellahi, who has an engineering background. He set up shop in Silicon Valley, where he had access to a vast pool of engineering talent to build the company's digital infrastructure, including mobile apps and websites. The digital offerings — mobile applications and websites — now available in 70 countries accounted for 12% of Western Union's revenues in 2018. That business continues to grow at a 20% annual pace.

The company also has embraced Silicon Valley's obsession with innovation. Last week Western Union announced a partnership with TechStars, a proven start-up accelerator, to nurture 10 early-stage start-ups in next-generation payment technology and cross-border money movement.

"We attribute our staying power and ability to reinvent ourselves to our innovation culture and openness to new ideas," said Jeff Hochstadt, chief strategy and development officer for Western Union. "We're excited to help these companies take their business to the next level and look forward to learning from them, too." This is Western Union's first direct involvement with an accelerator, although it has invested in start-ups and companies in the past.

How Jeff Bezos sparked a pivot

Western Union seized another opportunity to broaden its offerings when Amazon founder Jeff Bezos approached Ersek with a challenge at a Business Roundtable event in 2017. The giant e-commerce retailer faced a large obstacle to its global ambitions: Many potential customers in developing countries do not have formal banking relationships or credit cards to pay for purchases, recounts Loevenguth, who has managed the partnership with Amazon.

"I think they saw our global footprint, our compliance and licensing capability and our ability to offer a service to customers," she said. Now Amazon customers in 16 countries, including Kenya, the Philippines and Uruguay, can order products online using the PayCode option and go to a Western Union office to pay cash in their local currency.

The deal with Amazon expands Western Union's mission from serving individuals as customers to serving companies as clients and opens a new revenue stream. "We've been shifting toward a platform orientation for the past several years," she said.

You have to have the courage to disrupt yourself before you're disrupted by somebody else. It's in our DNA.
Rebecca Loevenguth
vice president of transformation, Western Union

Since 2007, Western Union has handled payments to customers in other countries for Google's AdSense advertising system. Western Union manages the complex business of paying thousands of publishers internationally in their own currencies and — if they want it — in cash. The company also provides a payment system in the education market, enabling more than 700 universities to received tuition payments from overseas. Loevenguth said there were other potential opportunities in e-commerce, travel and tourism. For example, owners of vacation rentals could get cash payments through Western Union outlets.

In partnering with Amazon, Google and other companies, Western Union makes the case that its vast physical network, its relationships with financial institutions around the world and its deep knowledge of financial compliance rules all have value in an increasingly digital age and reinforce its claim to be taken seriously as an innovator.

"We been shifting our thinking to a longer-term vision," says Loevenguth. "How do we take the assets we've invested hundreds of millions in over the years and meet the needs of other companies around the world? There is a much larger play for us here." While customers in 16 countries are now able to pay cash for orders with Amazon, she says many more countries will be added.

Stock performance metrics

Investors have not been as enthusiastic about Western Union. The stock has traded recently at around 30% below its peak in 2008. "Western Union has done reasonably well in that there's a decent segment of their business in digital," said Daniel Webber, CEO of FXC Intelligence, which tracks cross-border payment providers. But he is concerned the digital start-ups present a long-term challenge. "If you're digital the whole way, you don't have to pay the agent networks."

VIDEO3:3503:35
Western Union CEO on earnings and Amazon partnership

Jason Kupferberg at Bank of America Merrill Lynch is more skeptical. The analyst rates the stock to "underperform." "A lot of investors see the stock as structurally challenged," he said, because such a small part of Western Union's business is digital — the fastest-growing segment of the payments sector. And, he warns, the B-to-B sector, where the company is positioning itself as a platform, is also highly competitive.

In response to criticism of its lackluster market performance, a Western Union spokeswoman said, "Our business has been resilient and margins have been stable the past few years, but we are focused on delivering improved results in the future." During a call with analysts in May, Ersek touched several times on cost cutting: "Our overarching strategies remain: focus on driving digital expansion and growth, offering our cross-border platform to new business areas and generating operating efficiencies."

Deals like the one with Amazon — that make use of Western Union's physical presence as well as its investments in digital — could go a long way toward convincing investors that the 168-year-old can still be the life of the party. In addition, the familiar black-and-yellow logo remains a significant asset, both for consumers and businesses.

"Our brand has the trust of customers," said Fellahi. In a world where companies come and go in the blink of an eye, Western Union's longevity could be an advantage.

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