Western Union has dominated international money transfer for over 100 years.
Behind a long period of dominance is normally a wide moat, and that’s certainly the case with Western Union. Its strength is in its network of agents.
You've probably noticed them in a post office or convenience store. They act as departure and destination points for international money transfer. With 500,000 around the world, Western Union has the greatest number of stores by some margin, and this means it’s the most convenient for the consumer.
Replicating Western Union’s network is time-consuming and expensive so few have tried and most have failed. This lack of competition has allowed Western Union to generate enviable returns for a century and counting.
But, as history shows, technological change often unseats entrenched incumbents. Today, the smartphone poses the first credible threat to Western Union’s supremacy, and Australian software company eServGlobal is hoping to get a piece of the action.
Here’s how. The bulk of global remittances flow from rich countries to poor. In regions like Kenya and Sri Lanka the use of bank accounts is low, but the use of mobile money applications is rising. Vodafone’s M-Pesa is the poster child with over 25m Kenyans using mobile money for almost every facet of commerce. Similar mobile money applications have sprung up all around the world.
With its 35% investment in Homesend (Mastercard owns 55% and BICS owns 10%), eServGlobal is seeking to establish a network that dwarfs Western Union’s. It has signed over 70 money transfer organisations and telco operators throughout the world. Companies like M-Pesa, Moneygram and Worldremit, which have large bases of existing users, can sign up to increase their network reach.
Homesend is essentially an aggregator of networks that charges 1.5% for facilitating payments between them and acting as a central clearing house. That's a long way from the 10% Western Union charges. Its big leap came when it signed up Mastercard, making it possible to transfer money from a Mastercard credit card to a Kenyan phone. A physical network would struggle to compete with such a wide-reaching, low-cost competitor.
This might sound like a slam dunk, but it’s not. The rest of eServeGlobal is an absolute mess.
Remember, Homesend is just a 35% owned investment that produces no income. eServGlobal's solvency depends on its core business, which sells software to third-world telcos – and that hasn’t generated cash in years. To call its capital structure weak would be kind. Another capital raising seems inevitable.
Homesend also hasn’t taken off like you might expect. Management has had success growing the network, but it's proved harder to get people using it. Despite being cheaper and easier than Western Union, it seems old habits die hard for consumers. There's also the possibility that the disrupter is itself disrupted by distributed ledger (also known as 'blockchain') technologies, or that Western Union gets its mobile act together.
For all those concerns, it is eServGlobal’s warts that keep us away.
We will continue to follow the Homesend story, but we are much more likely to be customers than shareholders.
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