Western Union, the 160-year-old money transfer and payments company, operates across 200 countries and territories through 450,000 agents. Its consumer customers are largely migrant workers sending earnings back to their family in their home country. So changes in employment levels worldwide, tighter government controls on immigration, political unrest, and exchange-rate instability can all have a substantial effect on the company’s earnings.
But Western Union’s global scope is also a big benefit. While unemployment in the United States has been persistently high, the World Bank recently increased its forecast for remittances in developing countries to $349 billion, and estimates volume of $404 billion in 2013. Indeed, there are still plenty of greenfield opportunities for Western Union: other than the United States, no one country represents more than 6% of the firm’s top line.
In addition, Western Union is developing channels in online and mobile money transfer, stored value cards, and business-to-business payments. To broaden its reach in the market for cross-border payments between small and midsize enterprises, for example, in June the company announced the purchase of the global business payments division of Travelex Holdings Ltd.
CFO recently spoke with finance chief Scott Scheirman about the favorable and unfavorable trends for Western Union and how the company manages a laundry list of risks. An edited version of the interview follows.
Despite high unemployment in the U.S. and elsewhere, long-term global economic trends are in your favor in some ways.
As we look at the macro trends, we firmly believe the income gaps between developing and developed countries — what you can earn in Italy versus Romania, or in the U.K. versus China, or in the U.S. versus Mexico — are huge. You might earn $10 a day in one country when you can earn $10 to $15 an hour in the U.S. or in Italy. So we believe that income gap is going to be wide for decades. And the other factor we see is aging populations. In parts of Europe and Russia, populations are aging, and migrants are going to have to continue to come to those countries to perform services.
Which countries present the largest opportunities?
China, India, and the Philippines are huge “received” markets, meaning their citizens are migrating to other countries to earn money to send back. Between India and China combined, we have a bit over 100,000 locations for 2 billion–plus people. In the U.S., we have a bit less than 50,000 locations for about 350 million people. So we see some really nice growth opportunities still in China and India, as examples. Brazil is another market we’re very interested in. We just received our banking license [there]. It will allow us to do bill payments, offer prepaid cards, and handle payments for small-business owners.
But I would also say we see growth in Europe. We just completed the acquisition of one of our superagents, Angelo Costa, which does business in 10 countries throughout Europe. And a regulatory change called the Payment Services Directive, or PSD, will benefit us. In France and Germany up until about 18 months ago, we had to do business through banks and post banks. Now we can sign up retailers in France and Germany. Retailers are in the neighborhoods where our customers live and work, and they tend to have extended hours of operation and may be from the customer’s home country.
Given that you’re moving money across international borders, how do you handle large swings in exchange rates?
Let me first talk about consumer behavior. In the short term, consumers may send a little more money or a little less money depending upon currency moves. But over the long term, if you’re in Italy and sending money to your mother in Romania and her rent is 300 euros, she needs 300 euros. So over long periods we haven’t seen a big consumer impact.
But from a corporate-finance standpoint, whether the U.S. dollar is strengthening or weakening, we want predictability of cash flow and earnings. It’s hard to predict where currency rates will be 3 months or 12 months from now. Our strategy is twofold. One, we have receivables and payables — money we owe to our agents for money-transfer transactions or money that agents owe us. So we enter into short-term transactions to hedge those receivables and payables. Two, whether it’s from Germany or the U.K. or another country, we have to translate revenues and profits from the sterling or the euro or another currency back into U.S. dollars. We hedge the currencies 12 to 24 months in advance. On a full-year basis in 2011, if the European currencies move — pick whichever direction you want, up 5% or down 5% — that would impact our top line by $55 million. But the bottom-line impact would only be about $7 million, because we’ve effectively hedged our net cash flows.
Did you have any issues with the political unrest in the Middle East?
We were closed in Egypt for probably about a three-to-four-week period in February. We do business in the Ivory Coast, and from roughly about mid-February up until [mid-May], our business was not operating there. And then we actually do some limited business in Libya. That market went down about mid-February and it’s still closed. If you do business in 200 countries, there’s always going to be some political hot spots.
So how do you mitigate political risk?
Generally, nonfinancially. Some countries are “sending” markets. So we have a receivable from that agent that we have to collect on a daily or a weekly basis. Other markets receive funds, so you forward them money to make the payout. Part of our enterprise risk management is understanding the geopolitical risks, and then, as we think about receivables with agents, [the question is] how far do we want to go with a receivable balance? What’s our risk tolerance?
On top of all that, you have new U.S. financial regulations coming down the pike.
For remittance companies, they announced what the rules might look like in May. We’re very supportive and believe the rules they’ve announced are very workable. I feel like we do very well today with transparency and disclosure. If you send money to Mexico, you get a receipt that would have the terms and conditions. It would say that you paid — I’ll make up the numbers — $10 to send $300, and your brother in Mexico City would receive 12 pesos to the dollar as an exchange rate. The other thing we do with that transaction is what we refer to as “fixed on send.” When you put your $300 down on the counter, we confirm and lock in an exchange rate. If we tell you it’s 12 pesos to the dollar, when your brother goes to get pesos, he gets 12 pesos to the dollar.
Each country has its set of regulations. But that’s where I believe Western Union brings a lot of strength. We have over 400 people focused on regulatory and compliance activities. We’ll spend over $40 million a year doing that.