Is Western Union Ready for the Fintech Threat?
If he's worried about fintech upstarts or bitcoin offering a high-tech alternative to Western Union's bread-and-butter business of money transfer, Chief Information Officer David Thompson doesn't let on.
Thompson, formerly the CIO of Oracle, Symantec and PeopleSoft, offers a cogent case for the payment giant's ability to innovate and stay relevant as interest in blockchain-based and even digital currency payments escalates. To that end, Western Union recently invested in Digital Currency Group, an investment firm focused on bitcoin and blockchain startups.
The upshot of a recent interview with Thompson is that he feels the costs of scaling a payments business, and the barriers to entry created by regulatory regimes, are steep. It will be harder than many assume for challengers to undercut established players like Western Union (and their prices), yet the established players have to stay abreast of technological changes and modernize their services.
Time will tell how well companies like Western Union adapted to change, and how safe their positions really were.
The following is a transcript of Thompson's comments that was edited for length and clarity.
Some think bitcoin could be a cheaper way to send money around the world. At one point Western Union CEO Hikmet Ersek said the company would use bitcoin only if it was regulated as a currency. Has that position softened?
DAVID THOMPSON: [Western Union's new investment in] Digital Currency Group is clearly aligned to digital currency and blockchain capabilities and how that might be disruptive in many ways. That allows a firm that specializes in this space to gives us insight into firms that potentially could be a partnership for us, a technology we might want to leverage, a market we might want to be entering.
Clearly there's a lot of dialogue in the industry and the press about digital currency, and much of that talk has shifted to a discussion of blockchain and not necessarily the digital currency itself.
We anticipated that shift because with digital currency, when you really think about it, until you have an ecosystem where you can use that value, there's not a lot of value to the individual user or consumer. I personally mine bitcoins to understand the technology and the ecosystem, that's my interest as a technologist. The only person I can pay with bitcoins is the guy who maintains my sprinklers. I can't go to Whole Foods and buy my groceries with bitcoin.
I do see promise with blockchain in the sense that that open ledger is really good for potential record reporting of documents and smart contracts. There are many governments looking at blockchain as a way to do birth certificates or titles, a smart contract in which certain terms are triggered and then it registers itself on the blockchain. I think the public blockchain is difficult to do financial transactions with. If you take Western Union, JPMorgan Chase and Wells Fargo, we're public companies, and if our transactions were all public, looking at them could potentially enable someone to produce our revenue projections before we can.
I think you'll see more closed-loop blockchain usages for financial services. That's something we're working with DCG and getting their perspective on. We're a heavily regulated entity, we operate in more than 200 countries and territories, and we have a lot of regulatory scrutiny. So any movement into new things requires due diligence, requires dialogue with regulators.
You do have a partnership with Ripple, which uses blockchain protocols to automate international payments. How is that going?
We have a pilot in place with Ripple, where we're looking at Ripple for intercompany settlements and cross-border settlements. Ripple is a capability where correspondent banking could be disrupted. We're just looking at it as a way to streamline our settlement process. We do have a robust capability for settlement through 200 countries, technology we've built for ourselves. I'm always open to ideas of using open source capabilities or off-the-shelf technologies. I don't know if there's business value in it or not. We're still at that pilot stage.
There are a number of blockchain-type companies that are trying to offer their own international payments service — TransferWise, WorldRemit and a number of others. What's your attitude toward those disruptors?
As a company, we're going to have competition, because this is a very robust market — there's high demand from customers for cross-border payments and remittances. TransferWise, PayPal [which recently bought Xoom] and some of these other firms have focused initially on domestic money transfer. As soon as you cross a border, the barriers to entry are significantly higher because of the regulatory requirements, the licensing requirements, and the anti-money-laundering, fraud and risk mitigation you have to put in place.
At Western Union, we moved $85 billion last year in consumer payments and 484 million business payments. In our digital business last year we generated over $300 million in revenue. TransferWise only generated $14 million. We're a dominant player in the digital money transfer space, and we'll continue to build and innovate.
There are people who say the cost of international remittances has to go down, especially for migrant workers sending money back home. Does Western Union have a take on that?
Yes. We're one of the most competitive from a pricing perspective. In many corridors from a fee perspective we're free. In many cases, if you look at the cost to send $1,000 from your bank cross-border, they'll be significantly more expensive than us.
One thing that's omitted from a lot of folks who discuss this topic is they're not looking at a compliance solution. There's a lot of people who want to put in technologies that will do things faster, but they miss the point that you have to have an AML program in place, you have to have fraud and risk management in place, you have to have consumer protection processes in place. The second you put that infrastructure in place, your costs associated with that service internally go up.
Even services out there that say they're going to disrupt the world and this is going to be free, once they start figuring out the requirements mandated by regulators, it quickly becomes intolerable. And many of the firms you'll see in this space are not profitable. They're burning through a lot of money from venture capital.
You said you're leading a digital transformation at Western Union — what are some of the changes you've made and plan to make?
We've had a bill pay transformation team of about 400 people based in San Francisco for more than four years. That team has built a robust digital platform based on Hadoop technology, a big data capability that allows us to in real time look across billions of rows of data, looking for fraud and risk patterns and general compliance infractions.
We process 31 transactions per second and we apply 1,000 compliance and risk rules to every transaction. The capability also allows us to provide streamlined know-your-customer processes for consumers, so they can have as little friction as possible. Our mobile app is among the highest rated in the app stores. These tools allowed us to be the largest digital money transfer company.
We made an announcement in Q4 of last year of a new product called WU Connect. We've built a set of APIs that allows our cross-border money transfer capabilities to be embedded into social media applications and messaging applications. We have signed contracts with WeChat and Viber where they have embedded our money transfer product into their applications. So if you downloaded Viber now, you could do a money transfer across borders in that. They're trying to make their apps sticky so consumers stay with them. The cross-border remittance is very social, whether it's a mother to her son or a husband to his wife, so we're finding customers are very attracted to this capability.
Where else might WU Connect be embedded?
Many of our retail agents are banks and postal services. You're starting to see many of those banks very interested in doing P2P money transfers in their mobile applications. You'll see many banking partners taking on this capability.
Do you ever worry about the risk of cyberattack to the payments system? And has Western Union added any special security layers to its network?
Do I stay awake at night worrying about cybersecurity? It is one of my top concerns as a technologist responsible for our technology platforms. We spend a significant amount of time, energy and resources on cybersecurity at Western Union. That's important because we operate in so many different remote locations. Our board and shareholders are interested in making sure we have resources allocated to cybersecurity.
We also invest in third-party firms that evaluate our capabilities to ensure if we have a weak link, we strengthen it. We have invested significant resources in denial of service attack mitigation. We've also put in what we call defense-in-depth capabilities in our infrastructure — multiple layers of protection. That's a real critical point in financial services.
We've connected to many intelligence agencies and law enforcement organizations around the globe, and we are plugged into those threat notices so we can be prepared. We also closely watch our insiders — through background checks, through technologies that watch employee and contractor behaviors — and we also have separations of duties for certain tasks.
Editor at Large Penny Crosman welcomes feedback at firstname.lastname@example.org.