As part of my long-term study into the various operations of financial institutions, I have also come across ubiquitous payment processor Western Union. In what has now become seven years of writing about investments, I have never once endorsed Western Union as a potential investment. In early 2011, the stock traded at around $21 per share, a higher price than the current valuation of almost $17 per share, or around $7.5 billion.
Why do I never speak highly of it?
Because the terms of its costs with customers continues to get worse and worse.
The most vivid illustration of Western Union’s decline came in a working paper titled “Remittances and the Problem of Control: A Field Experiment Among Migrants From El Salvador” by Nava Ashraf, DIego Aycinena, Claudia Martinez, and Dean Yang.
Among many interesting data points, they observed that the typical El Salvadorian migrant worker in 1973, paid a fee of approximately 14% of the funds being remitted. If a migrant worker wanted to send $1,000 back home, there was a $140 fee attached to it. Today, that fee would be a flat rate under $2,000 for a cost of $95.
That is an incredibly high transaction cost that begs for the intervention of a competitor. And, as the article notes, competitors have arrived in the form of WorldRemit, which offers transfers of up to $1,500 from the United States to El Salvador for $9.99 if the funds are deposited as cash for next day deliver through three partner banking institutions–Banco Agricola, Banco Davivienda, and Fedecredito.
As a result of competitors like WorldRemit, Western Union has seen its share of U.S.-El Salvador transfers decline from an astounding 82% to 21% over the past forty plus years. The only reason why Western Union retains its hold among the El Salvador population is because of its first mover that gives rise to familiarity, but it is not an entity that is being explicitly chosen because it offers the best terms.
WorldRemit, and a dozen other competitors, charge dramatically lower fees than Western Union, while Western Union relies upon the legacy of having a near-monopoly status in prior generations.
Also, given the tech industry’s penchant for entering payment processing, coupled with the fact that high payment fees for migrant workers can fairly be described as a human rights issue that invites charitable-minded market entrants, I expect that Western Union’s $95 to $115 fees will not have staying power.
The pressure on transfer fees, which are the lifeblood of the Western Union business model, show up in the numbers. If you look at the earnings per share that a finance portal feeds you, you’ll see that Western Union grew its profits from $1.24 per share in 2008 to an estimated $1.85 per share in 2018.
But that figure is not reflective of profit growth but rather enormous share repurchases that were financed in part by Western Union taking on $2 billion in additional debt, bringing its own debt level to $3.2 billion. It earned $900 million in 2008 profits, and $800 million in 2018 profits. Its profit margins have declined from a high of 42% in 1984 to 19% in 2003 to 14% today.
I think those profit margins will continue to decline over time because the fees will have to come down. A business model that relies upon incredibly high, unsustainable fees is difficult to pivot because it is hard to find new revenues of growth that can cover the profits of old that are gradually atrophying. I would not be comfortable being middle-aged or older and having a meaingful percentage of my household wealth tied up in Western Union stock.