January 27, 2014, 3:46 PM — When Western Union sent its first telegrams across the frontiers of America in 1851, it struggled against companies with competing, incompatible technologies. Years of fierce wheeling and dealing helped Western Union acquire and neutralize rivals.
Then a prestigious 1860 contract to build the first coast-to-coast telegram system--which critics incorrectly said would never work--solidified the company's dominance. Even the eventual spread of the telephone and radio didn't derail the company, partly because by that time, Western Union had diversified from simply moving words to moving money, too.
In 2006, Western Union sent its last telegram. Today the $5.7 billion company makes most of its money from the fees it charges when people transfer funds and pay bills--and by hedging exchange rates for currencies in over 200 countries.
But a history of scrappy transformation doesn't guarantee the future. Western Union's business is conducted mainly in person, and in cash, in a world where money cards, digital currency and mobile payments are proliferating. A friend can pay you back for his bar tab with a text message. Bitcoins can buy you a spot on a Virgin Galactic rocket. Big banks, meanwhile, are horning in on Western Union's market: the estimated 2 billion people worldwide who don't have checking, savings or credit accounts.
To anticipate where new, profitable niches will emerge and to keep costs in line, Western Union must transform itself into a digital company. But it also wants to preserve the core business that has provided so much for so long. CEO Hikmet Ersek says he searched for months to find the right CIO to lead the effort. And two years into the job, that man, David Thompson, says Web and mobile technologies, along with a few irreplaceable proprietary systems, will be critical.
But, Thompson says, big data may matter most of all. Analytics could help Western Union sidestep the mistakes of familiar failures like Blockbuster and Borders. Understanding how people react to global migration pressures, geopolitical struggles, economic changes and natural disasters will shape Western Union's products and pricing, says Thompson, who is also executive vice president of global operations. "My team is starting to wake up to the fact that they're a partner in something that's really changing our company."
CEO Ersek is pleased with progress so far, but says, "We have a long way to go."
Upheaval in the financial services industry is being created by established players and entrepreneurs alike. Market-leading banks and credit unions offer mobile apps and on-the-spot loans. Startups are devising new ways to buy and sell with mobile phone swipes, scans and text messages. Bitcoins and other virtual currencies are now taken seriously by federal officials; Congress held fact-finding hearings on the topic in November.
These changes portend a "moment of creative destruction," says Lisa Servon, a professor at The New School who focuses on economic development and urban poverty. "Western Union sees the writing on the wall and, like everyone, is trying to figure out how to leverage new technology to improve their own services."
The question is whether Western Union will be fast and bold enough to emerge as a winner in the game of digital disruption. A slew of startups are clamoring to topple Western Union in the money-transfer business (see "Their Mission: Disrupt Western Union," below). "Establishing an infrastructure to operate legally and efficiently in a variety of countries will take some doing for startups," says Denee Carrington, a senior analyst at Forrester. "But Western Union can't just count on the fact that it's hard to insulate them forever."
Western Union's Ersek contends the company is already digital internally, conducting an average of 28 transactions per second. The real change the CEO wants is in extending digital capabilities to customers directly. But timing is everything. If Western Union overhauls basic customer interactions by throwing a lot of new technology at consumers, it risks alienating and losing them.
If the company moves too slowly, competitors will steal customers. Analyzing customer behavior will help Western Union find the right pace, he says, reeling off a series of IT-based ideas, such as analyzing what customers do in social media and measuring the results of online and mobile marketing campaigns.
Details, details, details are important to him, to hone strategy. "We want to know when a Filipino customer in the U.K. goes to church on Sunday," he says, by way of example. That way, Western Union can create customized products based on those life details. The Philippines is one of the most popular destinations for money transfers. Maybe a customer is in a family mood after church and will send money back home if offered a Sunday discount. "Not many companies have such global data."
Western Union's customers are both an asset and a risk. They don't have bank accounts for a variety of reasons. Maybe they're unemployed or they've abused accounts in the past. Maybe they have too little money to open an account. Maybe they can't or don't want to provide Social Security numbers.
Eight percent, or more than 25 million, of the 317 million people in the U.S. don't have bank accounts. In low-income areas, that number is much higher: In the south Bronx in New York City, it's 50%. The unbanked market in the U.S. alone is worth $78 billion, estimates the Center for Financial Services Innovation, a nonprofit group that promotes public policies to help the underserved.
If Western Union is right in estimating that 2 billion people are unbanked and under-banked worldwide, that's 28% of the Earth's population who, by definition, even global behemoths like JPMorgan Chase and Deutsche Bank don't reach. Western Union's customer database, therefore, is of "enormous value," Ersek says. "You can't imagine."
For example, analyzing the behavior of so many under-the-radar consumers tipped Western Union off to the developing financial crisis in 2008, he says. Customers were sending less money in the average transaction and conducting fewer transactions, the data showed. This prompted Western Union executives to revise their financial expectations and warn Wall Street six months before others in the financial industry caught on, he says. "These customers are totally different than customers that typical financial companies serve," he says.
It's hard to say whether Western Union and competitors like MoneyGram unfairly exploit the unbanked, according to Servon.
Western Union also hedges currency exchange rates, profiting from the difference between what it paid when it bought a currency and the rate it charges customers when they come into a store. This foreign exchange revenue is a growing part of total sales--24% in 2012, up from 21% in 2011.
The company also charges fees for many popular transactions. For example, it costs a customer $10 or $12 to send $100 from New York to Slovenia, or $5 to send $100 from Boston to Manila using a credit card. Some transfers are free to the sender and receiver (for example, during a promotion), but Western Union still makes money from the currency exchange rate.
"If you look at cost relative to income, [these customers] spend much more on financial services than you and I," Servon says. "But I don't know that there's any way else to send $100 to Philippines every two weeks."
Actually, there are many ways, if Western Union's patent portfolio is any indication.
IT for Better Business
As with its "magic eye" high-speed fax machine in the 1950s, the company is trying to stay ahead of customers, to offer them more choices when they're ready. In just the past two years, Western Union has obtained 52 patents for inventions, including various kinds of mobile transactions, refundable prepaid transaction cards, and a system that lets you transfer money using the wireless technology in your car.
Last year, the company got a patent for technology that transmits fingerprints, facial geometry and other biometric data during a financial transaction. Sometimes, birth certificates, identity cards and other documents for verifying identification are scarce, as in remote areas of the Philippines. There, Western Union won permission from regulators to use fingerprints instead.
The idea came from a local Western Union team, including an IT staff member, CIO Thompson says. Having technologists stationed in various global locations helps the IT group tune into cultural norms and nuances, he says. "I don't want us to be a big monolith in corporate that doesn't understand."
Since he arrived, Thompson has been trying to make IT more responsive to business needs. He has built up analytics muscle with a Hadoop cluster and Tableau reporting tools. He also put six data scientists in strategic locations--two in the U.S., two in India and two in China.
Instead of having to wait until the analytics guys in Denver headquarters wake up and get to work, the marketing, sales and operations staff can send queries to the data scientists on call. Follow-the-sun analytics keeps the momentum going, he says. "Our business is 24/7. We get questions throughout the day and night."
Plus, each team specializes in different areas. In the U.S., the data scientists are experts in e-commerce and mobile analytics, for example. In India, it's analyzing customer trends and doing segmentation. In China, modeling risk and demographic analysis.
Improving e-commerce is a top priority for the company this year, something Wall Street investors frequently question executives about. Compared to regular retailers, Western Union does little business online, and it aims to change that. Electronic channels accounted for 2% of revenue in 2010. Now that number is 5%. By 2015, Ersek hopes it will be $500 million, or about 10%.
Aside from attracting customers who want to send funds and pay bills online, the website offers the company other financial benefits. Namely, Western Union doesn't have to pay commissions to a sending agent online, though it does have to pay credit card fees. Right now, while Ersek and Thompson spend money to enhance the site, transactions there carry lower margins than those conducted in physical stores. But by 2015, the margins should be up to par, CFO Scott Scheirman recently told investors.
The company is also working on ways to advance its regulatory compliance system, which is a proprietary system developed over decades and which is considered a competitive advantage. The compliance engine ensures--in a split second--that transactions adhere to the many layers of federal, state and local regulations that apply where Western Union does business. It also generates a risk profile for transactions and individuals. The system can't be duplicated by would-be rivals, at least not easily or without considerable expense. "That is a significant barrier to entry to our industry," Thompson says.
In a recent patent, Western Union describes technology it created to mask customer data from a phone operator but pass it on to remote servers for verification. With a smartphone, users could also scan and transmit codes imprinted on paychecks, for example, or the magnetic strip of a card, but the data would remain private except to the software verifying it.
As good as its compliance systems are, however, they're not perfect. And regulations around the world are changing all the time. State and federal agencies, as well as government agencies from other countries, have increased requests for data in recent years as they investigate money laundering and terrorist financing activities. And some provisions in the 2010 Dodd-Frank Act are affecting Western Union's money transfers to Mexico and Latin America. Compliance costs money.
To meet regulatory deadlines, Western Union has to add staff to manually carry out verifications while IT works on building the new checks into the compliance engine, Thompson says. In all, Western Union spent $100 million in 2012 on anti-money-laundering compliance efforts alone, and Ersek is committed to building "best-in-class" programs in this area.
Meanwhile, the company is still dealing with a 2010 settlement it reached with Arizona and three other states that claimed the company didn't effectively monitor compliance of money transfers in and out of Mexico. The agreement calls for Western Union to improve its compliance programs along the U.S. border, which the company is still working on.
Western Union must heed rulings from a court-appointed monitor overseeing the programs and has spent $71 million on the settlement so far. The company is also the target of an ongoing money-laundering investigation related to the activities of current and former Western Union agents. The company "continues to cooperate fully," according to financial documents. A spokesman declines to comment further.
It's one thing to slice and dice data. But it's another to apply findings in a way that doesn't cannibalize current business but rather moves at the customer's pace, or perhaps just a touch faster, while keeping competitors at bay.
For Western Union to thrive, executives have to be careful not to over-rely on any one asset, says Dave Aron, a Gartner analyst who has studied business model disruption. Like ants at a picnic, competitors are constantly looking for ways to work around obstacles to get to the pie. For example, banks are trying to win over some of Western Union's customer base of unbanked and under-banked consumers by offering reloadable, prepaid cards that work like debit cards. JPMorgan Chase launched one in 2012.
It doesn't help that competitors have some powerful allies. The Federal Reserve and the World Economic Forum, among other entities, want to find ways to draw the unbanked into the mainstream financial system for many reasons.
They want to encourage saving, while a money-transfer company like Western Union doesn't have regulatory approval to offer savings accounts. They also want consumers to have recourse if funds are lost or stolen; with cash, you're out of luck. These organizations see mobile banking as the key. A recent survey by the Fed finds that 63% of unbanked and 91% of under-banked consumers in the U.S. have a cell phone.
Ersek and Thompson agree about mobile's potential. Western Union's mobile app helps customers find local agents and stage transactions on the phone, so everything's ready to go when they get there. One future enhancement developers are working on is prescheduling regular transactions and pre-populating data fields, to save time.
Such personalization is good, but Western Union doesn't want to lose the genuine interpersonal relationships between customers and agents that feed trust in the brand. That's a key difference between a bank and a company like Western Union, Servon says. Customers who come in regularly to conduct the same transactions develop rapport with agents. "For the companies that sell the products, their business depends on those relationships," she says.
Technology like compliance systems and patented inventions is indeed an advantage, Aron says. But truly innovative companies also try to capitalize on broader concepts. That might include ideas such as trust and customers "as whole people," he says. For example, at 7-Eleven Japan, senior executives realized that the company's fundamental asset was its knowledge of the small communities where its convenience stores have stood for so many years. The company expanded into adjacent businesses lines, adding dry cleaning, postal services and other ways to do chores inside 7-Eleven stores.
"Big data led them to say, 'We understand the community better than anyone else,'" Aron says. "They realized they know how to solve daily problems."
Western Union has no plans for a dry-cleaning business. But it is stretching its thinking about what a money-transfer company can be.
Copying moves from the retail industry, Western Union's Thompson talks about offering special deals for frequent buyers. Analytics makes it possible to sift out, say, customers who send $50 to Thailand every week. That kind of regular customer could get a personalized offer--maybe a package of five transfers per month for a discounted fee, he suggests. "We use your usage pattern to customize your experience," he says. "That's just for you."
IT and marketing are working together to understand larger societal and behavioral trends that can affect business. For example, analyzing internal and external demographic data can predict migration patterns and help determine where to open a new retail location. And tracking the "migrant diaspora" that Western Union's CMO talks about would let the company create special online promotions for customers who are culturally similar but geographically dispersed. Thompson wants his IT team to help business colleagues anticipate such trends, to "get ahead of the business with our data," he says.
One recent insight Western Union found is that when customers who usually do business in person come to the website, they act differently from newer customers whose main interaction with the company has been online, he says.
By identifying who's who as soon as someone arrives at the website, the site can present options in a different order, he says, so an individual gets the experience that makes the most sense to him. Changing the flow of screens and promotional offers can increase loyalty and yield higher revenues, he says. This kind of analysis is improving collaboration between IT and sales. "The business says, 'I got a half-point uptick because of [those changes].' We say, 'That's great.'"
Of course, the CEO also wants all the IT work to deliver significant financial payback, and fast. "We don't pour money into anything without returns," he says.
ROI on the CIO
One big investment Western Union's CEO has made is swapping out one CIO for a new, more expensive one from outside the industry. John Dick, who was CIO from 2008 to 2012, was reportedly asked to leave, telling an audience at a Forrester conference that Ersek sought someone with different skills. A Western Union spokesman confirms that the company rethought the CIO position.
"The role and priorities of the position were realigned around our technology and operations needs to better drive our customer-centric strategy," he says, declining to comment further. Dick, who is now CIO at staffing firm Towers Watson, didn't respond to a request for comment.
While Dick had spent nearly all of his 32-year career in financial services, Thompson hadn't ever worked in financial services before. His most recent CIO jobs were at Symantec, Oracle and PeopleSoft. When Western Union's board of directors discussed what to pay Thompson, they considered not only the going rate for CIOs but also the magnitude of what they were asking him to do, according to the company's latest proxy statement. Earning $3.4 million, he is the second-highest-paid officer at the company, behind Ersek. So far, the CEO calls Thompson "one of my best hires."
Startups Plot to Dethrone Western Union
Plenty of companies, big and small, want to steal Western Union's business using advances in electronic money and digital payments. Some startups are partnering with established players in telecommunications and other industries to reach consumers who usually don't have bank accounts, but who nonetheless pay bills and send money to family and friends. Others are working feverishly alone.
Since 2011, venture capitalists have invested at least $104 million in money-transfer startups, according to researcher CB Insights, which characterizes these 39 deals as attempts at "disrupting Western Union."
"The money-transfer market is ripe for disruption because it's not a very satisfying experience for a customer right now," says Denee Carrington, a senior analyst at Forrester.
For example, senders wait at a customer-service desk, fill out paperwork and then have to wait again while the transaction is processed. Customers also can't usually track their transactions along the way, like they would with a FedEx package, and sometimes receivers don't get the funds, Carrington says. Plus, customers must pay fees and currency exchange rates set by Western Union and MoneyGram, the dominant players.
Smart competitors have examined the customer experience and are trying to capitalize on its faults, she says. Xoom, for example, offers text and email tracking of transactions. The company, which went public a year ago, operates in 30 countries and claims 997,000 active customers.
Here's a sampling of other companies nipping at Western Union's heels in money transfers or bill payments:
TransferWise uses peer-to-peer networks to let users send money to each other internationally. The London company, started in 2011 by two Estonian entrepreneurs with experience at PricewaterhouseCoopers, Skype and other tech companies, targets students, expatriates and travelers. But anyone can use it. TransferWise bills itself as a cheaper, faster alternative to banks.
Dwolla is a startup that built a proprietary payment network that allows customers to move money from their bank accounts for 25 cents per transaction, or for free on transfers of $10 or less. Customers can use their cellphones, email addresses or accounts on Facebook, LinkedIn or Twitter.
Barclays Pingit is a mobile money-transfer app launched by the banking giant in 2012. It lets people 16 and older use their cellphones to send money to other users in the U.K. Pingit is instant and free.
Several companies, including most of the big banks, are issuing pre-paid or other forms of debit cards to move money internationally. Payoneer does this too, plus offers e-wallets that are localized to various countries. Metabank's AiAdvance prepaid cards, meanwhile, carry the Visa and MasterCard brands.