With the close of its acquisition of Travelex Global Business Payments (TGBP) division today, Western Union creates the largest nonbank provider of business-to-business payment services and a formidable competitor in the cross-border payment space.
Both Western Union and TGBP cater to small and midsize businesses, which generate cross-border payment revenue that McKinsey & Co. estimates at $24 billion. Today, that revenue is mostly captured by banks. Western Union is developing a plan to fully integrate its platform with TGBP's, a move that will enable the combined entity to leverage the current strengths of each unit and increase market share, says Dave Owen, vice president of business development at Western Union. A formal announcement of the deal's close was made today as the Association for Financial Professionals kicked off its annual conference in Boston.
Englewood, Colo.-based Western Union, with $5.2 billion in 2010 revenue, has long been a provider of international consumer payment services. It expanded into the B-to-B payment market in 2009 when it acquired Canada's Custom House and launched Western Union Business Services, which offers cross-border payment and currency-hedging services.
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The combined Western Union and TGBP business-services units will operate in 18 countries and generate about $400 million in revenue, Owen says.
"The ability to work with 140 currencies and deliver payments in those currencies is something neither company could have done on its own," he says.
Each company's human capital, local branches and licensing assets give the combined entity much broader reach as well as a bigger presence in countries in which they currently overlap. Each side has specific strengths that can be leveraged across the whole, Owen says. TGBP's GEO Global Clearing Network, for example, uses local clearing systems to provide customers with faster, less expensive payment services than those available through bank correspondent networks. Western Union, meanwhile, has 455,000 agent locations in 200 countries and territories, and its local relationships should help the merged business services unit establish footholds in new countries more quickly.
Western Union can also offer its other services, such as prepaid debit or credit cards, says Owen. Funds could be delivered overseas to employees via the payment options TGBP did not offer—or through bank branches. "We have some distinct channels we can build into our value proposition," Owen says. "So businesses can make those payments in ways that Travelex couldn't provide."
The cross-border payment market for midsize and smaller companies appears to offer significant opportunity for Western Union's newly fortified business services unit. Aite Group, a Boston-based research firm, estimates that about one-third of midmarket importers pay their overseas suppliers in dollars and miss out on potential benefits from paying in the local currency, such as negotiating better pricing, lowering exchange-rate risk and fostering the goodwill of vendors. Western Union can facilitate payments in local currencies as well as hedge currency-fluctuation risks by using forward and option contracts.
Large multinationals also use Western Union now and could use the new entity for payment services or to hedge part of their books. Midsize and smaller companies, whose treasury departments don't have the resources to support cross-border activities, are more likely to use Western Union's services.
"They tend to use us to outsource their treasury functions for [cross-border] hedging and payments," Owen says.
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