Blockchain technology still has not proven itself invaluable to cross border transactions and remittance, but it's turning enough heads that Western Union has begun investing in its possibilities.
Blockchain is the distributed ledger technology commonly associated with bitcoin. It is drawing interest from financial institutions for its ability to improve the speed and security of payments, while also being able to divorce itself of its roots in digital currency.
"For a company the size of Western Union, we can't afford to say blockchain is something we don't know about," said Jean Claude Farah, executive vice president and president of Middle East Africa, Asia Pacific, Eastern Europe & CIS for Western Union, which has made an undisclosed investment in Digital Currency Group, a company that partners with financial institutions to build non-bitcoin uses for blockchain technology.
"At the end of the day we're looking at how we can harvest that technology," Farah said.
Back in 2014, Western Union's leadership had an openly dismissive outlook on bitcoin. While blockchain is not synonymous with the digital currency it supports, it's clear that Western Union has begun to take the world of digital payments more seriously than it did just two years ago.
Some newer remittance and cross border payment startups are using blockchain technology to avoid fees from companies such as correspondent banks that manage foreign exchange. Other companies, such as Remitly, are focusing more on building local networks to execute transactions and are relying less on blockchain.
"While [incumbents] see the potential for a ton of benefit with blockchain, there is no urgency to invest capital to build out the technology immediately," said Talie Baker, an analyst with Aite Group. "Some are dabbling with the technology in house and others are partnering. This allows them to keep their fingers on the pulse of what's happening with the technology while they wait and see where it goes in the industry."
Blockchain can be useful in the transfer industry because it entirely displaces the need for third parties, and even large institutions, to manage transfers, the Counterparty Foundation's Chris Derose wrote in PaymentsSource.
"The technology behind [bitcoin] holds significant potential for behind-the-scenes transaction processing, so those that could use the technology and/or those that could be disrupted by that technology are most likely to make some investments," said Rick Oglesby, a partner at Double Diamond Group. "Western Union fits both categories."
As the one of the payments industry's most recognizable brands, Western Union is ostensibly in the crosshairs of most remittance or cross border startups, leaving the company in a position where it has to consider how to respond to business models that may not have even come to market yet. "We try to remain abreast of any technology that people are testing," Farah said.
Western Union has also increased its use of more general mobile technology to speed transfers and counter the incursion from digital-focused remittance startups. Western Union's Bangladeshi collaboration with MasterCard relies on a six-year old mobile financial services company, bKash, to add channel flexibility for remittances.
"The beauty of the bKash collaboration is it's a 'receiver' model, so the sender doesn't have to change anything. The receiver decides to pull the transaction into a bank account or a mobile wallet," Farah said.
Western Union hopes to take this approach to other countries, though each market poses unique challenges.
"It could be transferrable to other countries, but the one thing you need to understand is how many people are using mobile wallets in those countries," Farah said, adding a country like India, where there are 300 million mobile wallets, could be a huge market, but it also has significant regulatory hurdles in place.
African countries, which have a track record of successfully providing mobile wallets to the underbanked, could also be a target to extend the bKash model, Farah said.
"We have fingers in many pies," Farah said, adding even cash is still a major part of Western Union's model since many of the countries in its network still transact mostly with paper. At the same time, the "wind is blowing" from brick-and-mortar to digital in cross border payments, he said. "The beauty of the strategy is we're not taking anything off of the table."