The Fastest Way To Make Money

By Julie Rawe

Mention Western Union to an American, and chances are he or she will think of telegrams and maybe that '60s frat-rock song of the same name. But in the rest of the world, Western Union means money. Having converted its wire traffic from text messages to cash, Western Union increasingly serves as a rough-and-ready bank for millions of migrant workers who send part of their pay to loved ones back home, whether from an Arizona broccoli field to a Mexican village or from a Saudi oil field to Bombay. As the pace of global migration quickens, so does the business of Western Union, which this year will add 20,000 cash-dispensing outlets to the 159,000 it operates in 195 countries and territories--nearly four times as many locations as McDonald's, Starbucks and Wal-Mart combined. Quietly, Western Union has become one of the world's most pervasive--and profitable--financial institutions.

Over the past decade, remittances of wages from migrant workers to their native countries have risen 44%, to an estimated $138 billion last year, and they are projected to grow an additional 28% over the next three years. According to the Nilson Report, which tracks payment services, Western Union controls nearly 80% of the electronic money-transfer market in the U.S., the world's biggest sender of remittances, which helped it pick up a nicely rounded $1 billion in profit last year from $3.2 billion in revenue. But several years of 30% profit margins have drawn complaints of price gouging--and a host of new competitors ranging from big U.S. banks (Bank of America, Citigroup, U.S. Bancorp, Wells Fargo) to credit unions to foreign niche players like Remit2India.com and FXRemit.com which caters to Filipinos. Western Union president Christina Gold, 55, a former Avon executive, is responding by giving her firm a makeover. Long billed as the "Fastest Way to Send Money," Western Union has just launched a $300 million global ad campaign using a new slogan, "Uniting People with Possibilities." The company is clearly trying to soften its image. But its executives are under no illusions: defending its lead is getting harder than ever, requiring big investments in new technology and new outlets, especially in the burgeoning markets of China and India.

For thousands of tiny villages around the globe, Western Union serves as the main link to the global economy. About 100 miles south of Mexico City, in a valley framed by towering pre-Columbian ruins, sits Coatetelco, population 15,000, which has a beauty parlor but no bank. A few people grow maize, chilies and fruit, but remittances--mostly from agricultural or construction workers in Georgia and the Carolinas--account for a staggering 90% of the villagers' incomes. Patricio, 49, who stopped working in the U.S. three years ago, says sending money to Coatetelco has become more convenient and less expensive since his return. At the end of each month, he gets a call from his two sons, who are working illegally in Georgia. They give him a code number, and he drives or rides his horse four miles to the nearest Western Union, located in a government telegraph office, to pick up the $600 they spent $40 to wire to him. Less expensive remittance services are available at the nearby Banamex bank in Mazatepec, but so far, Patricio and his neighbors aren't willing to travel the eight miles to get there. Besides, he says, "we do not trust the banks, and they make everything more difficult."

Since its founding as a telegraph company in 1851, Western Union has pioneered the stock ticker (1867), the electronic money transfer (1871), the credit card (1914), the singing telegram (1933) and intercity facsimile service (1935). But since 1995, when it became a division of the Denver-based First Data Corp., the world's biggest credit-card processor, Western Union has focused on electronic payments. Western Union processed nearly a billion checks and money orders in 2001 and is the biggest mortgage-payment processor in the U.S. It has also become a leader in the gift-card market, with clients including Blockbuster and Toys "R" Us.

But money transfers are Western Union's bread and butter, last year accounting for 80% of the division's revenues, which in turn make up some 40% of First Data's. "It's a sleeping giant," Gold says of her company, "in the sense that many people still think of us as an old telegraph company and don't really recognize how connected we are to the populations of the world." Appointed president in May 2002, Gold, a Montreal native, is working to update the company's image, which was one of her specialties when she ran Avon Products' North America division. Gold for several years served as CEO of the Dallas-based Excel Communications, which uses Avon-style direct-selling methods to market long distance, wireless and other phone services. Since she arrived at Western Union, she has focused on giving the brand a unified look and feel. "At one point, we had 87 different logos around the globe," she says.

Brand awareness remains crucial in the money-transfer market, where transactions are up in part because of increased migration but also because more of the cash sent by the workers of the world is starting to travel through formal channels. Even gargantuan Western Union gets only a 12% slice of the total remittance market because so many people still send money by mailing a check or getting someone to hand-deliver the money. Every month in Los Angeles, German, 33, sends $100 to his sister in Nicaragua via Western Union or, whenever possible, by a courier who charges a couple of dollars less. "Two dollars is not a big difference here, but it's a big difference in Nicaragua," he says.

Many migrant workers also use black-market currency traders. Known as hawala in the Middle East, hundi in India and fei chien ("flying money") in China, these unlicensed remittance networks were targeted by the U.S. after 9/11, because some had been used by al-Qaeda and other terrorist networks. The following month the U.S.A. Patriot Act made participating in these networks a felony, and the law has been used more than 20 times against alleged violators.

Pakistan has taken a different approach to encourage the use of formal banking channels. The government set up an incentive program that gives overseas Pakistanis who send home more than $10,000 a year higher duty-free allowances and access to VIP airport-customs counters. The program also establishes remittance-based admissions quotas at the country's public universities. Official remittances to Pakistan, which has some 1,300 Western Union outlets, are expected to reach $4 billion this year, nearly triple the amount logged three years ago.

Meanwhile, governments in Latin America are working to get remitters out of Western Union and into less expensive banks. People from this region, responsible for 60% of worldwide growth in money transfers since 1999, sent home $32 billion last year. They also shelled out $4 billion in remittance fees, or about 12.5% of the money they sent--nearly 50% more than what Turks pay to wire funds from Germany or Filipinos pay to send money from the Persian Gulf. Latin American migrant workers pay more because they tend to steer clear of banks in their home countries as well as abroad. In Mexico, for example, only 1 in 5 citizens has a bank account. Unstable local currencies don't help matters, nor does the memory of mid-century bracero contracts, which temporarily withheld 10% of the wages of Mexican guest workers in the U.S. That money was never deposited as promised into Mexican savings accounts.

"About 70% of our members have never opened a bank account, not here or in their country of origin," says Luis Pastor, CEO of the Latino Community Credit Union, based in Durham, N.C. "From the moment a person enters our offices, we are with him at least 45 minutes, explaining what a bank account is, what a credit union is, what services we offer." Mostly, however, it is the word-of-mouth testimonials that help newcomers get over their distrust of financial institutions and stop worrying that the credit union will report them to immigration officials. The credit union, which charges $10 to wire as much as $1,000 to some 2,500 locations, remitted $1 million last year through IRnet, a four-year-old proprietary money-transfer network owned by the World Council of Credit Unions.

Until the late '90s, U.S. banks largely ignored Latino migrant workers, in part because many were in the country illegally and lacked the identification necessary to open an account. Enter a tamper-proof version of the matricula card, issued by Mexican consulates in U.S. cities to verify Mexicans' identities without divulging their immigration status. This ID card has prompted Bank of America, Citigroup and Wells Fargo to each partner with a big Mexican bank and launch binational ATM-based money transfers. Today money transfers are still mostly face-to-face transactions involving tellers, but that will change with the expansion of ATM networks. "ATMs are a bigger threat to money transfers than a lot of people believe," says UBS senior analyst Adam Frisch. "But we're not there yet. Remember, for a long, long time people didn't use ATMs because they wanted to wait in line to see a teller put a stamp on the receipt. But that was obviously overcome." In an acknowledgment that the switch to bank accounts could be slow, Wells Fargo has started offering to wire cash as Western Union does--for customers who don't have accounts. Citi has dropped its fee from $10 to $5 for transfers of as much as $3,500. And in June U.S. Bancorp teamed with a rural consortium to reach the millions of Mexicans who live in areas not served by large banks.

Western Union has fought back by slashing its fees from $30 to $15 to send as much as $200 from the U.S. to Mexico. The company also introduced alternative delivery options in Mexico that cost less (and take longer), including $10 home-delivery service in which a messenger brings cash to the recipient's door. These changes helped reverse a brief decline in transaction growth south of the border, with Mexico accounting for about 5% of Western Union's revenues. But more drastic price cuts may be required now that a binational clearinghouse, announced in June, will allow U.S. banks to send funds to their Mexican counterparts for about 60-c- per transaction.

This move could hasten Western Union's foray into the fledgling ATM-based money-transfer market. Its parent, First Data, is in the process of buying Concord EFS, based in Memphis, Tenn., which owns the STAR, MAC and Cash Station ATM networks, to become one of the world's biggest ATM owners.

Citigroup, which in the late '80s launched a Western Union clone that tanked within two years, is probably the best positioned of the banks that are competing with Western Union. Citi bought Banamex, Mexico's second largest bank, in 2001 and has a strong banking presence in India, where the company is the largest credit-card issuer. "But at this point it's still the elephant and the flea," says David Robertson, publisher of the Nilson Report. By year's end, Western Union will have set up shop in 15,000 India Post offices.

For now, Western Union has only one truly global competitor, which is stuck playing David to its Goliath. MoneyGram was founded in 1988, back when Western Union was spiraling toward bankruptcy. The industry leader had made a bad bet on its Telex division, which was obliterated by the sudden rise of the fax machine. But MoneyGram was dumped for antitrust reasons in 1996 after its parent company, First Data, picked up the much larger and better known Western Union, which had filed for Chapter 11 in 1993.

Now a subsidiary of Viad, based in Phoenix, MoneyGram has more than doubled its global agent base, from 25,000 to 60,000, within the past three years. MoneyGram also scored a few big wins last year, including deals to place its outlets in Wal-Mart stores and Canada Post offices. "We're trying to be nimble and move quickly," says Phil Milne, who heads the money-transfer company, based in Minneapolis. MoneyGram generally charges lower transaction fees and offers a better exchange rate than Western Union. But Western Union, having partnered with national post offices in some 25 countries, including a recent double whammy in India and China, has a reach that is unsurpassed.

For all their recent successes, Western Union execs seldom forget the firm's Telex debacle, and some remember a much earlier--and bigger--mistake. In 1876 Western Union had the option to buy Alexander Graham Bell's new telephone but dismissed it in an internal memo as a device that "is inherently of no value to us." Bell sold the rights to what is now AT&T. First Data's pending purchase of ATM powerhouse Concord EFS shows that it is determined that Western Union won't get left behind this time. --With reporting by Deborah Edler Brown/Los Angeles, Paul Cuadros/Durham, Cheryl Jackson/Chicago and Dolly Mascarenas/Coatetelco

With reporting by Deborah Edler Brown/Los Angeles, Paul Cuadros/Durham, Cheryl Jackson/Chicago and Dolly Mascarenas/Coatelelco