Western Union Beware

Stephen DeAngelis

October 6, 2006

In an earlier post about the global commute, I noted how important global workers are to the Philippine economy. Mary Jordan, writing in the New York Times, relates how cell phones are rapidly becoming a new banking medium [“New Conductors Speed Global Flows of Money,” 03 Oct 2006]. The principal characters in her article are a young woman living in the Philippines (Dulce Amor Bandoy) and her uncle, Eugene Bandoy, an architect who lives in London. The uncle routinely sends small amounts of money to his niece via her cell phone. Jordan writes:

The cellphone-based system that conveys cash between Bandoy and her uncle has the potential to revolutionize the way hundreds of billions of dollars are moved around the world, according to experts who study global cash flows. Cash that relatives working abroad send home is not only vital support for millions of families but a cornerstone of national economies from Mexico to Lesotho. The World Bank estimates that global remittances last year topped a quarter of a trillion dollars, with $13 billion flowing into the Philippines alone.

The reasons for using this new method of transferring funds is simple — speed and affordability. In the past, Eugene Bandoy would have transferred money using a traditional money transfer organization like Western Union or a bank, but they are both slow and expensive. As Jordan notes:

Traditional methods of moving money in small, personal amounts can be slow and costly. Western Union, the world’s largest money-transfer business, would charge $22 in fees on a $26 transfer from London to Manila. Banks also demand substantial fees and often take two or three days to complete a transfer.

A quick scan of Western Union’s web site provides no indication that it is moving into this area in an attempt to maintain its position as the world’s largest money-transfer business. Its most recent partnerships have been with traditional financial services companies like Bank Al Bilad of Saudi Arabia, Chilexpress, one of Chile’s largest domestic couriers, Grupo Elektra, a leading retailer in Mexico, and Travelex, the world’s largest non-bank foreign exchange payments company. With the potential of being priced out of a huge amount of business, one would think that Western Union would be looking to establish partnerships with cell phone vendors. Jordan reports how cell phone money transfers work between London and Manila.

When [Eugene] Bandoy heard at a Filipino community event that he could send up to $200 through his cellphone for as little as $7, he eagerly signed up. … Bandoy walk[s] up the steps to a second-floor office in a stately office building in Kensington, central London. There, Gen Ashley [waits] in the one-room office of her remittance company, Twilight Express. Ashley, a sharp, friendly businesswoman, has thousands of customers, who among them send about $2 million a month home to the Philippines. Recently, she said, several hundred of them have begun asking her to send money through the two giant Philippine phone companies, SMART and Globe Telecom. … Bandoy turn[s] over the cash in the pound equivalent of the amount he needed to get to his niece, plus a $7.50 commission (Globe says that it collects 50 cents of that). Ashley [twirls] her fingers across her computer keyboard. Bandoy had already registered with her, producing his passport as identification, an anti-laundering precaution. She click[s] on his name and up pop[s] his account information. Dulce Amor Bandoy [is] listed as his recipient, and Ashley scroll[s] down to her cellphone number and click[s]. She type[s] in the amount he [is] sending and the day’s exchange rate for the British pound and Philippine peso. Then she hit[s] the “send” button to move the order to the phone company. Seconds later, a message appear[s] on her screen, confirming the transfer.

In the Philippines, Dulce Amor Bandoy waits for her cell phone to signal her that money has arrived. When it does, she heads to the mall, walks “into the glitzy Globe phone store, where customers can browse the flashiest new phone models and pick up G-cash, as the company calls money transferred via phone.” In the store, Dulce provides “her name, phone number and address on a ‘cash-out’ form and hand[s] it to the clerk.”

The clerk look[s] up her account on his computer and then [sends] a text message to her phone that read[s], “To Cash out 1,200.00 of G-Cash from Globe Robinson’s Place, Reply with your MPIN.” She type[s] her four-digit mobile personal identification number into the phone pad and hit[s] reply. The clerk [gets] the confirmation he need[s]. Less than five minutes after arriving at the store and after paying 26 cents — a 1 percent fee — she walk[s] out with about $24 worth of Philippine pesos.

This scenario is predicted to repeat itself millions of times over the coming years. Jordan writes:

The cellphone-based system that conveys cash between Bandoy and her uncle has the potential to revolutionize the way hundreds of billions of dollars are moved around the world, according to experts who study global cash flows. Cash that relatives working abroad send home is not only vital support for millions of families but a cornerstone of national economies from Mexico to Lesotho. The World Bank estimates that global remittances last year topped a quarter of a trillion dollars, with $13 billion flowing into the Philippines alone.

For all I know, Western Union may be negotiating with cell phone carriers to get itself in the game. Any resilient enterprise examines alternative futures, especially those that could adversely affect its business model, and positions itself to respond. Clay Christiansen, in his book The Innovator’s Dilemma, notes that many companies in Western Union’s position (i.e., market leaders) fail to see niche businesses (like cell phone money-transfer companies) as threats because most of their current customer base doesn’t use them. At some point, however, niche services are “good enough” and much cheaper than traditional providers and they abandon the traditional company for the newcomer. Too often, such companies are blindsided and their valuation plummets. It won’t surprise me to read in the near future that Western Union has established relationships with foreign-owned cell companies in emerging markets to jump into the cell phone money-transfer business.