Western Union Co. has struck a deal that will make it a competitor, but also a potential partner, for banks trying to capture a bigger chunk of the business payments market.
Western Union on July 5 announced it was buying the business payments division of London-based Travelex Holdings Ltd. for 606 million pounds (US$975 million or 673 million euros), as it tries to expand beyond the consumer remittance services that are currently its bread and butter business.
The deal, which is expected to close late this year, eliminates the Englewood, Colo., company’s largest non-bank competitor in the cross-border business-to-business payments market. While banks also pose competition to Western Union’s strategy, they also could help the company advance.
“We will utilize Travelex Global Business Payments’ expertise with third-party distribution partners such as financial institutions,” Raj Agrawal, the general manager of business payments solutions at Western Union, said during a conference call with analysts.
Agrawal added that Western Union has more than 1,000 relationships with financial institutions and “many of these could benefit from our offerings to service their business customers.”
Western Union said it is specifically targeting the international payments of small and medium-sized businesses, which the company said represents about a $24 billion revenue opportunity, citing statistics from McKinsey & Co. and its own estimates.
While offering its business payments platform through banks could help it expand such services, banks have also been trying to strengthen ties with small-business customers by tailoring treasury management systems built for large corporations for these clients.
“There has been a growing demand in the small and middle-market space … for the ability to make international payments effectively and easily,” says Mark Webster, a partner with the consulting firm Treasury Alliance Group LLC. “A lot of banks have been looking at that space and saying, 'How do we do it effectively?’”
Western Union has worked with banks on the consumer payments side of its business, using them to expand its network of 450,000 agent locations worldwide where customers can go to send and receive money and pay bills. For example, Regions Financial Corp. recently said it would offer Western Union money transfer and bill payment services at 1,700 of its locations in 16 states (
The same agent model Western Union uses on the consumer side would apply to business payments, Hikmet Ersek, the company’s president and chief executive, tells PaymentsSource.
“What the banks are doing is they use us to serve their [small and medium-sized businesses] and say, ‘OK, why don’t you use Western Union Business Solutions to transfer the money or receive the money’ and we pay the banks a commission for that,” Ersek says.
In addition to the 1,000 financial institutions already working with Western Union on consumer payments, the acquisition of the Travelex unit also adds 500 banks globally that will be using its business services, Ersek says.
The company will target smaller and mid-size banks that lack the scale to offer international payment services.
“We also know that we probably won’t play a role in big corporations, big companies who they already have an established service where they transfer” money globally, Ersek says.
Given Western Union’s experience in risk management, having had to meet anti-money laundering and other compliance requirements, the company is well equipped to grow its business payments operation, says Andrew Jeffrey, an analyst with SunTrust Robinson Humphrey.
The Travelex acquisition “does give them scale and give them reach,” he says. “I don’t think it changes the competitive environment vis a vis the banks. I think the banks would like to offer the services more downstream.”
The banks most likely to partner are smaller and midsize-banks versus large banks, which are more likely to focus on their own home-grown systems, Webster says.
“The bigger banks … have been salivating and working very hard on international remittances and that whole market,” Webster says. “The smaller banks have been saying, 'Well, gee, we want to be able to compete because we don’t to lose that, so there may be some willingness to use a third-party provider.”
Western Union established its business platform with the 2009 acquisition of Custom House Ltd., a Canadian company that offered international B-to-B payments services.
In the quarter ended March 31, global business payments generated $182.1 million in revenue compared with consumer payments, which generated $1.08 billion in revenue. Western Union reports second-quarter results on July 26.
As a result of the Travelex acquisition, the company expects to generate $400 million in revenue from business payments in 2012, Ersek said on the conference call.
The deal will also bring the number of countries in which Western Union offers its business services to 16 from nine and create a total sales force of 450 people, Ersek says.
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