Are digital transformations working for Western Union, MoneyGram?

For Western Union and MoneyGram, the threat of digital payments must be transformed into an opportunity if either company is to survive.

For the past two years, the companies have embraced strategies to make their networks — which have long relied on human agents and physical locations — easier for customers to use. They have established an online presence, introduced loyalty programs, lowered prices for online transactions, and made strong pushes for turning new customers into repeat customers.

At the same time, P2P entrants like Venmo and Zelle threaten their domestic businesses, while new models for cross-border payments take aim at their global operations.

At this point, Western Union and MoneyGram are already seeing their transformative efforts reflected in their financial statements. But their battle is far from over, and both firms must decide how they will juggle the balls of customer acquisition, transaction volume and revenue flow in the digital era.

In earnings calls this week, both companies reported lower revenue for the first quarter of 2019, but pointed to strong digital growth that will bear fruit for the second half of the year and well into the future.

Denver-based Western Union reported $1.3 billion in revenue for the first quarter, a decline of 4% from the previous year; while Dallas-based MoneyGram delivered $315 million in revenue, a drop of about 17% from a year earlier.

"Digital business continues to drive our results, with 19% transaction growth on WesternUnion.com in the quarter," Western Union CEO Hikmet Ersek said during Tuesday's earnings call.

Because MoneyGram has had its online option in place only in the past year, its online transaction volume growth outside of the U.S. showed an increase of 107% over the first quarter of last year.

While MoneyGram still has much work ahead of it, the company did report that total digital revenue represented 16% of its overall $273 million in money transfer revenue. That overall number is down from $336 million in the first quarter of 2018, in part because of lower online pricing. Building loyalty programs and offering various promotions geared toward moving customers into the digital habit would affect company profit margins for as long as they remain a focus.

Western Union reported that WesternUnion.com consumer-to-consumer revenue increased 17% to go along with the 19% hike in transaction volume. Overall, digital revenue accounted for 13% of Western Union's overall C2C revenue.

Neither company plans to rest on its laurels.

MoneyGram is in "a large-scale customer acquisition mode," CEO Alex Holmes said during Wednesday's earnings call.

The introduction of new "click-through" digital products in various markets has delivered new customers to MoneyGram, many of them becoming repeat customers, Holmes added.

MoneyGram brought digital capabilities to 24 countries, up from only three countries last year. The company is partnering with banks and e-wallet providers in Canada, the U.K., Chile and parts of the Middle East and Europe. In Bangladesh, MoneyGram landed partnerships with Krishi Bank and Jamuna Bank, expanding on areas in which cash payouts to gig workers are common.

Aside from modernizing traditional wire-to-cash networks, the digital advancements have helped both companies more clearly focus on their major intention — to provide cross-border payments.

Western Union clearly had that in mind when selling its domestic U.S. bill-paying system Speedpay to ACI Worldwide, a $750 million cash deal that is expected to be completed in a few days, Ersek said.

Western Union's focus on cross-border payments will accelerate through another digital transformation — converting agent locations to operate with digital technology. The best example of that unfolded last month when Western Union revealed it would work with the Dollar General discount chain to provide mobile- or browser-only money remittances at those stores.

The move puts more emphasis on the Western Union mobile app as the go-to method to initiate money movement and avoid a lot of forms and paperwork within the physical store.

"Dollar General will be a great partner for us in giving us 14,000 retail locations that will not be treated in the traditional way," said Raj Agrawal, executive vice president and chief financial officer at Western Union.

In the Dollar General setting, a customer places a money transfer transaction through their mobile device or WesternUnion.com before coming into the store. Upon arrival, the customer would complete the transaction with the store clerk.

"It saves time for both the customer and the front-line associate at Dollar General," Agrawal said. "Dollar General is fully ramped up for this, so it's just a matter of getting the customer traffic into these stores."

Western Union views the time and cost savings as something that would result in a lower cost transaction. "It is a great product offering for consumers," Agrawal added.

MoneyGram is also working to lower costs, but the company has had to tighten its own belt to coincide with its expansion onto the digital landscape. The company reported operating costs at $307 million for the quarter after restructuring and improving operating systems, down 18% from $374 million a year ago.

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