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Don't Write Off Western Union and MoneyGram Just Yet

Adam Rust's picture

Posted April 18, 2014

Ninety-six percent of Americans live within fifteen miles of a Walmart and it will not be long before they can all save a lot when they want to transfer money. 

The new Walmart-2-Walmart service is an affordable option that should disrupt the domestic

market for money transfer services. Actually, disrupt might be a conservative description. In the narrow transmission segment to be served by Walmart will be catastrophic.

But don't think that it is going to transform money transfer. Moreover, while it will hurt MoneyGram, I don't think Western Union is going to be too bothered by Walmart's entrance. 

At the moment, sending money inside the United States is an expensive proposition. In fact, it is fair to say that it is beyond expensive if you want to send more than a few hundred dollars. Let's imagine that you want to walk into a competitor - in this example it will be Western Union - and send $900 to a friend living inside the U.S.  Walmart's service allows a person to use cash, debit, or credit. They say that they can make the transfer to a customer who is waiting inside another Walmart within a few minutes.

At Western Union, instance service with a card costs $76. At MoneyGram, an immediate transfer from a debit card to a person waiting in a store costs $85. Wal-Mart is going to charge $9.50 for the same service. That sound you hear is a primal scream from Western Union and MoneyGram. Even someone who is willing to wait for three days is still going to pay a lot more at Western Union. One to three day service on $900 cash currently costs $52. 

Sam's Way is to find places where market power has been allowing companies to get away with charging high margin and then to drop those prices to absolute minimums. Along the way, they take cross-subsidies when new products allow them to drive more traffic. Free tax prep and free tax refund check cashing were two examples, but there are many others. It is no coincidence that BlueBird and free register reloads are also available at Walmart.  

But Don't Write off MoneyGram and Western Union Just Yet

Even as I write, it seems clear to me that the impact of Walmart-2-Walmart may not be as big as it has been reported in the media.

There are plenty of other segments where the pure money transmitters will not be impacted. Walmart will not be competing in international markets. Sending money overseas is a very big part of what Western Union and MoneyGram offer. Only 30 percent of MoneyGram transactions are from the US to another place in the United States. The domestic business is also the segment with the slowest growth.  Whereas domestic US transfers grew by 7 percent last year, those going from the US to another country increased by 18 percent. Foreign transactions increased 13 percent. Sends to Mexico are once again hot now that the U.S. housing market is revivifying. 

In short, Walmart is taking volume from a small slice of the slowest-growing (albeit the one of the highest margin) segments in money transmission. 

By the way, some people think that Western Union has a dramatic advantage in low-income distressed neighborhoods. If you live in a Walmart desert, then you still have to go to a Western Union.

Since we are on the topic, what do you think is a bigger concern to those people that live in a both a Walmart desert and a food desert? I'll bet they long more for a Wally World. I am pretty sure it is the opposite for people that are lucky enough to live in a neighborhood that is neither.  

Moreover, it does not look like they will have an online service of any kind. They won't have something like WUPay that allows a consumer to pay their utility bill from an in-store kiosk. 

Mobile transmitting services are blossoming, particularly in under-developed countries. The entry by Walmart will not make a difference there, either. 

But a significant share of MoneyGram's domestic business is currently taking place inside Walmarts.

All of that is to say that I think that Wall Street is over-reacting. Shares in MoneyGram fell almost twenty percent yesterday. Western Union took a hit, too, although it was not as much. MoneyGram is going to be hit harder, because it has its products in Walmart stores. There is no way that Walmart-2-Walmart is going to do enough damage to take away one-fifth of their earnings.