May 8, 2015, 8:26am
Money-transfer services- Bigger but not better
Western Union and MoneyGram's proposed merger is good news for shareholders, but less so for consumers
ON MAY 6th, market rumours suggested that Western Union, the world’s largest provider of money-transfer services, was in talks to buy MoneyGram, a rival. Although Western Union has hotly denied the reports, in recent years sending cash between countries has become big business: each year people send over $400 billion in remittances to developing countries. Even so, both firms face competition from new entrants, such as TransferWise, that use cheaper technologies to undercut their rivals. A merger could help both firms survive the onslaught. But there are strong competition concerns over whether such a deal would be good for customers.
A merger between Western Union and MoneyGram makes sense for their shareholders in several ways. Both firms are facing tough financial times. In the first three months of this year, Western Union’s revenues declined by $90m, compared with the previous quarter. Worse still, MoneyGram reported a loss of $72m during the same period. This is partly due to wage growth remaining low in the developed world: 80% of Western Union's business consists of low-income migrant workers in the West sending money back home to poorer countries.
A deal would also help the two incumbents defend themselves against newer and more innovative firms. The market for money-transfer services has had an influx of new entrants, such as WorldRemit and Xoom, with new technologies. Although Western Union and MoneyGram’s fees undercut traditional banks—averaging 9% as opposed to traditional banks’ 13%—new firms are charging even less. TransferWise, the most prominent example, only charges only 1% for transfers made through its smartphone app.
A merger may also give Western Union and MoneyGram the financial firepower to match the technological innovations of its new competitors. TransferWise, for example, is able to charge such low fees because it matches senders to recipients in the host and destination countries. As the transfer is made between people within the same country, no banks or international-payment systems are involved at all, reducing costs. In order to compete, Western Union and MoneyGram will have to develop something similar.
Whether a merger would help customers, however, is less clear. There are good anti-trust grounds for blocking the merger. The two firms have a record of anti-competitive behaviour in Africa, where they face much less competition. The Overseas Development Institute, a think-tank, estimates that Western Union charges a mark-up of more than eight percentage points on all remittances sent to Africa. It is common for Western Union and MoneyGram to operate "exclusivity clauses" with banks. This helps keep transfer costs high, since customers have no other choice. Such behaviour keeps money in the hands of firms in the West, rather than the developing countries to which it is being sent.
Both the firms and their customers would benefit in the long run from cutting fees. A merger could do so, by letting the two firms cut their fixed costs, for instance, by pooling their bricks-and-mortar shops and agents. Western Union and MoneyGram have the advantage of having a physical presence, and taking cash in areas where customers may not have bank accounts. But to reach previously untapped users, who have no loyalty to any particular service, Western Union and MoneyGram will have to cut fees dramatically to stay competitive. With the financial innovations that make this possible, there is now no excuse for high fees.
Courtesy The Economist