Bain & Company Western Union Remittance Strategy Fall 2016

Transcription

1 Bain & Company Western Union Remittance Strategy Fall 2016

2 Bain & Company SIBC Analysts Miles Wood Freshman Business & ACMS Kansas City, MO Regina Zavala Rangel Freshman Economics Monterrey, Mex Connor Murphy Sophomore Pol. Science & Economics Portland, OR Roberto Elosua Gomez Sophomore Finance & Stats Monterrey, Mex Jose Fernandez Trevino Sophomore Pol. Science & Economics Monterrey, Mex Daniel Murphy Junior Mech Engineering & ACMS Riverside, IL Blair Yiyang Hu Sophomore Pol. Science & Economics Shanghai, China Meredith Henry Sophomore Liberal Studies & Film/Television Harrison, NY Yiling Zhou Sophomore Finance & Economics Shanghai, China Bernadette Grant Sophomore Undecided Business Chappaqua, NY 2

3 Executive Summary Client Western Union is global financial services company specializing in payments. 80% of its revenue comes from remittances, or C2C international payments. Situation Solution Western Union s relatively large remittance market share is declining, though the overall industry is growing. Western Union is mainly struggling with problems of reach and costs. Western Union should integrate brick-andmortar partnerships with a new digital platform to target underbanked populations in developing countries and reduce transaction costs. 3

4 Western Union should integrate new physical partnerships with a reengineered digital platform Physical Partnerships Oasis Digital Platform Objectives Oxxo / Safaricom Locations Leverage WU Connect Stellar Mobile Platform Partner with companies with large reach as withdrawal points WU Leverage WU Connect s reliability and interface to streamline development Impact Greater Reach Greater Profitability Lower Transaction Costs $ Partner with Stellar to create blockchain based mobile payments platform Expand Market Share by targeting mobile users in developing countries Revenue Costs Stellar s blockchain technology can reduce transaction costs by 25% 4

5 Western Union Remittance Strategy Western Union Overview Remittance Market Overview Problem Identification Reach Costs MTOs Banks Informal FinTech Analysis and Comparison of Segments Recommendation: Physical-Digital Integration Impact Risks Timeline 5

6 Western Union s remittance-dependent business model is under pressure Background Business Segments Founded in 1851 Provides money movement and payment services world-wide 500,000 agent locations worldwide 100,000 ATM Locations Consumer to Consumer Allows people to quickly send or receive money anywhere around the world 80% of revenue and 90% of profits Consumer to Business Singular or recurring payments to businesses International B2B crossborder, crosscurrency payment services Business Solutions Facilitates payments for small and medium enterprises across borders and currencies Revenue Stagnation and Decline Gross Profit Margin Decline Revenue (in billions of dollars) Gross Profit Margin (%) CAGR: -1.3% Year Year Sources: Morningstar, Business Essentials 6

7 Western Union has made several efforts to develop technologies that respond to the digital evolution of the remittance industry WU Connect: P2P Payment Solution Allows money to be sent over social media and consumer messaging platforms Viper and WeChat Can send up to US $499 for pickup at agent locations in 200+ countries Can fund money using credit card, debit card or bank account and send to agent location, a mobile wallet, or bank account Leverages trusted brand name with enhanced customer engagement Offers online money transfer services Can send up to US $3,000 and even more using online foreign exchange service WU.com Send from a bank account, credit or debit card to a mobile phone or bank account 80% of new WU.com customers are new to Western Union Consumer Propensity to use WU Connect Explosive Growth of WU.com (Q1 2016) Viber WeChat 23% 18% 18% US +56% +43% Growth 13% 8% 5% UK +67% +76% 3% -2% 1% WU.com Total C2C Revenue Growth -1% Middle East and Africa 1% Latin America and Carribean -1% Asia Pacific North America 0% Europe and CIS Source: Save 7

8 Western Union Remittance Strategy Western Union Overview Remittance Market Overview Problem Identification Reach Costs MTOs Banks Informal FinTech Analysis and Comparison of Segments Recommendation: Physical-Digital Integration Impact Risks Timeline 8

9 The worldwide remittance market is experiencing growth driven by developing nations Basic Overview Segments Market Share $586B Industry in 2015 $436B to developing countries 22% 41% MTOs Banks Remittances have steadily climbed since 1970 Expected $636B Industry by % 16% Digital Hawala/Informal Geographical Overview Takeaways Top Remittance Senders Top Remittance Recipients Growth 3.5% growth projected from 2015 to 2017 United States ($133B) India ($69B) Saudi Arabia ($46B) China ($64B) United Arab Emirates ($30B) Germany ($23B) Russia ($16B) Philippines ($28B) Mexico ($25B) Nigeria ($21B) Developing World 74% of remittances sent to developing world Majority of growth comes from developing markets K, SaveOnSend, Infosys, Pew Research Center 9

10 Digitization has disrupted the remittance industry, creating downward pressure on fees and necessitating responses from established players Technological Shift Decreasing Remittance Fees in All Segments Digital services account for 53% of the industry Proliferation of smartphones among remittance senders and receivers % % % % % Average digital money transfer fee of 5.32% in 2015 Exploration of Alternate Platforms Consolidation in the Industry 90% of money transfer between friends and family Social Media Platform Traditional agent-based business models are diversifying into new revenue streams Facebook and WeChat have extensive international consumer base Money Transfer Service Increased Accesibility Innovative money transfer players looking to become generic money management players Example: PayPal acquired Xoom for US$890m in 2015 Infosys, World Bank 10

11 Western Union Remittance Strategy Western Union Overview Remittance Market Overview Problem Identification Reach Costs MTOs Banks Informal FinTech Analysis and Comparison of Segments Recommendation: Physical-Digital Integration Impact Risks Timeline 11

12 Despite growth in the remittance industry, Western Union s market share is decreasing due to fee pressure and digitization, creating a problem of reach and costs Key Trend: Digitization Mobile money based remittances are fastest growing remittances product by transactions volumes with a rate of +52% 16% 15% 14% 13% 12% 11% 10% Reach Western Union Global Market Share Costs Decreasing Remittance Fees Downward Margin Pressure Infoysys, World Bank, McKinsey & Company, GSMA, Pew Research Center, SaveOnSend 12

13 Western Union Remittance Strategy Western Union Overview Remittance Market Overview Problem Identification Reach Costs MTOs Banks Informal FinTech Analysis and Comparison of Segments Recommendation: Physical-Digital Integration Impact Risks Timeline 13

14 MTOs, although they comprise the largest segment, are facing decreasing market share and margins Major Players Quantitative Analysis 13% Market Share 41% 5% Margins 25% 4% Average Transaction Size $ % Fee Services Overview Methods of Money Transfer Send money online Money Transfer Currency Exchange Bill Payment Send money in person Send money directly to bank accounts Prepaid Debit Cards Check Cashing Money Orders Send money to a mobile wallet Send money to an inmate World Bank, S&P Capital IQ, MoneyGram, Ria Financial Services 14

15 Ria s comparable business model reveals the risk of specific expansion strategies Company Overview Fee Structure Founded: 1987 Headquarters: London, England Company Description: Operates the Money Transfer segment of Euronet Worldwide, Inc. As the third largest money transfer company in the world, Ria has a global agent network of over 316,000 locations in 150 countries worldwide. In addition to money transfer services, the company offers bill payment, mobile top ups, prepaid debit cards, check cashing, and money orders. Money Amount Send Location Destination Send/Pick-up Methods Fee Average Intl. Transfer: $300 Estimated Average Intl. Fee: ~7-8% Interview with Former COO WU experiencing price pressure from third parties People want to go to a branch, hand money to a person, and let the recipient collect it in person Cash isn t exiting the market because of its ease of use and anonymity Ria and 7-Eleven Partnership Money Transfer services available in 7-Eleven Card-based, telephone originated remittance Failed due to lack of personal interaction S&P Capital IQ, Ria Financial Services, Interview with Tim Fanning (Former COO of Ria Financial Services) 15

16 Western Union Remittance Strategy Western Union Overview Remittance Market Overview Problem Identification Reach Costs MTOs Banks Informal FinTech Analysis and Comparison of Segments Recommendation: Physical-Digital Integration Impact Risks Timeline 16

17 People tend to trust traditional banks over other money-transferring alternatives % Trust in Traditional Banks All Unbanked Underbanked Banked Segment Overview Receive 70% of volume globally. Top 4 US banks are responsible for half of all banks remittance volume. Banks retreating from money transfer industry due to high regulations. I trust traditional banks more than I do online banks Using a peer-to-peer lender is riskier than getting a loan from a traditional bank or credit union I would consider using banking services from a nonbank (i.e. Walmart) Segment Response to Technology Increasing e-commerce and electronic payment technology will bring revenue growth Majority of revenue comes from data processing and transaction fees from credit/debit purchases. More people trust traditional banks over online platforms. The underbanked sector would rather get a loan from a traditional bank. Trust in traditional banks rises with household income, but so does demand for other alternatives. Ratio of electronic payments to cash payments has increased. Transaction volumes for processors in industry have gone up. 17

18 Western Union Remittance Strategy Western Union Overview Remittance Market Overview Problem Identification Reach Costs MTOs Banks Informal FinTech Analysis and Comparison of Segments Recommendation: Physical-Digital Integration Impact Risks Timeline 18

19 Informal money transfers through legal and illegal channels rely on the personal networks of brokers Business Structure Definition: An alternative, informal remittance system that works by transferring money without actually moving it. It usually involves a hawaladar (broker) delivering money from his cash reserve or account at the request of a counterpart hawaladar in another country who is serving a client Worker in Country 1 Remittance Code Family in Country 2 Remittance Code $ $ Broker in Country 1 Call / Fax / Broker in Country 2 Legal: Money transfers using conventional bank routes, postal money orders and goods swaps Balancing Methods: Hawaladars usually wellconnected business owners Illegal: Smuggling of currency, commodities or invoice manipulation Chief Organizer, UN, IMF, Global Development Research Center, William and Mary, WAIFEM, Regalii 19

20 The Hawala system is low-cost but presents serious regulatory issues Evaluation of Hawala System Quantitative Analysis Pros System is self-regulating, it is rare for hawaladars to defraud one another or their clients Very small operating costs and ensures anonymity for clients Cash based without any need of formal banking (ideal for unbanked clients) Market Share 120 Days ~22% Margins 2% Average Transaction Size $200 7 Days.25% to 1.25% Fee Cons Moderate barriers to entry (must know a trusted hawaladar to participate) Due to its obscure and informal nature, extremely hard to regulate (illegal in some countries) Money laundering and other criminal activities rampant in system The UN estimated that $100-$300 billion moved through informal money transfer systems Margins are expected to stay at around 2% for the 53% foreseeable future 65% Very little overhead compared to other formal transfer channels Enables hawaladars to charge much lower rates than alternative official channels Chief Organizer, UN, IMF, Global Development Research Center, William and Mary, WAIFEM, Regalii 20

21 Western Union Remittance Strategy Western Union Overview Remittance Market Overview Problem Identification Reach Costs MTOs Banks Informal FinTech Analysis and Comparison of Segments Recommendation: Physical-Digital Integration Impact Risks Timeline 21

22 FinTech, a new segment, is poised to take over the remittance market Relevance Quantitative Analysis 40% global internet access 63% global mobile phone penetration Market Share 21% Margins 1% Traditional Remittance Digitization Average Transaction Size $ % Fee Digitization 1. Less Information Required 2. No Phone or Laptop Required 1. Lower Price 2. Faster Transactions 3. Increased Security 1. Less buildings and personnel means less costs. 2. Virtually Instantaneous 3. Travel less distance for money, less liquidity (theft) Over $24 billion in investments over past six years More than 5,000 FinTech Startups 22

23 M-Pesa offers a blueprint on how to successfully integrate digital and physical payment systems Diverse Partnership in Creation M-Pesa was created by a joint venture between UK s department for International Development and Safaricom (Vodafone). Volume of Transactions Over 43% of the value of GDP in Kenya in 2013 flowed through M-Pesa 237 million person to person transactions in that year. Critical Success Factors Inclusiveness Extended financial inclusion for 20 million Kenyans. By 2011 more than 72% of the people in Kenya living under $1.25 a day used M-Pesa Expansion M-Pesa later evolved from only a payment facilitator to a provider of loans and savings products. M-Pesa can also be used to pay salaries and bills. Effects Challenges Household income increased by 5-30% due to M-Pesa s efforts Decrease in time spent going to bank, standing in line, etc. Trouble replicating Corruption and Money Laundering Severe International Competition Experienced troubles in expansion Weak law enforcement in target areas 255 services in 89 countries Source: Forbes, The Economist 23

24 M-Pesa limited requisite technology and partnered with existing retail networks to expand its service Partnerships: M-Pesa Agents Bank Aversion 40,000 agents 60% of M-Pesa users do not have a bank accounts Safaricom Retailers Select Banks Key Demographic: Underbanked Physical Integration: M-Pesa Agent Tasks Registration into system Deposits/Withdrawals Customer Education Seamless Integration of Physical and Digital Requirements SIM Card Phone often borrowed in rural settings Balance Can be deposited at convenience stores 24

25 Western Union Remittance Strategy Western Union Overview Remittance Market Overview Problem Identification Reach Costs MTOs Banks Informal FinTech Analysis and Comparison of Segments Recommendation: Physical-Digital Integration Impact Risks Timeline 25

26 FinTech companies are creating downward fee pressure, straining traditional players with respect to reach and costs Average Remittance Costs 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% MTO Mobile w/ Cash Mobile w/out Cash 0.00% $50 $100 $150 $200 Consequences of Fee Pressure Industry Responses 35% Share of FinTech segment devoted to payments Reach Costs $174 billion P2P payments growth WesternUnion.com, TransferWise.com, Infosys, World Bank, Reuters, SaveOnSend 26

27 The FinTech segment offers the most upside potential in the future of the remittance market Summary of Analysis of Remittance Market Segmentations Segment Mkt. Share Share Trends Margins Margin Trends Avg. Fee Barriers To Entry Regulation Overall MTOs 41 % Negative 25 % Negative 9.63 % N / A Medium Banks 16 % Neutral 12 % Negative % High High Informal 22 % Neutral 2 % Neutral 1.00 % High Medium FinTech 21 % Positive 1 % Positive 3.46 % Low Low Factors Supporting an Entry Into The FinTech Segment Mkt. Share Trends Only FinTech segment has positive growth Customer Type Underbanked Represents 75% of overall market Success of Startups M-Pesa handles 43% of the value of Kenya's GDP Efficient Solution Best area for solution given constraints: time, budget, feasibility 27

28 Western Union Remittance Strategy Western Union Overview Remittance Market Overview Problem Identification Reach Costs MTOs Banks Informal FinTech Analysis and Comparison of Segments Recommendation: Physical-Digital Integration Impact Risks Timeline 28

29 Western Union can alleviate its reach and costs problems by adapting the M-Pesa model Problem: FinTech Player Entering Remittance Market Reach: Falling Market Share Costs: Falling Remittance Fees Solution: Expand M Pesa Model Partnerships Physical-Digital Integration Days Physical: Convenience Stores Digital: Stellar Partnership Flexibility in Partnerships by Use - Case / Country Physical locations serve: to reach customers as withdraw points REACHES more customers Stellar partnership serves: to reduce costs to digitize use Reduces COSTS Flexibility in integration target large physical partners by country utilize local infrastructure 65% Impact Risks Implementation $ Reduced costs and greater market share will produce $204- $957 MM in profits Security, regulatory, and brand confidence risks have been addressed 2017 With Stellar, Oxxo, and WU Connect, this strategy can be implemented by late

30 Western Union and other remittance companies have pursued comparable partnerships Stellar Overview WU - Oxxo Partnership The Organization Nonprofit that connects people to low-cost financial services The Network Gateways Users and Services Made up of servers that contain a shared database of all accounts on the network Entities that connect to the stellar network and lets incompatible organizations interact efficiently Developed at the local level Partnership with Deloitte and Tempo Partnership with Mexico s largest convenience store chain with 14,000 locations Flexibility: three modes of payout Doubles retail network in Mexico Deloitte Partnership Tempo Partnership Reduce cost of transfers by up to 40% Transactions completed in 5 seconds 600,000 transactions for $.01 Increase transparency and reduce remittance fees Stellar, Western Union 30

31 Western Union Remittance Strategy Western Union Overview Remittance Market Overview Problem Identification Reach Costs MTOs Banks Informal FinTech Analysis and Comparison of Segments Recommendation: Physical-Digital Integration Impact Risks Timeline 31

32 Western Union can cut variable costs to lower its remittance fees and win market share Profitability Optimization Model Profit Revenue Costs Market Size Market Share S(P) Price per Remittance Fixed Costs Variable Cost C(P) In order to calculate the effect of lowering remittance fees on the overall market share, we need to assume a demand curve that accurately portrays the remittance market. Demand Curve Logistic Concave Convex Shape S(P) Pros Diminishing returns to raising and lowering fees Diminishing returns as fees approach 0 Traditional approach, data-driven elasticity Cons Assumes higher market share at high fees Diminishing decreases not present as fee grows Monolithic elasticity unrealistic 32

33 Successful implementation of the solution greatly increases both market share and profit Scenario Base Case Worst Case Best Case Description Current WU Situation Failure to increase market share Grow share and maximize profit Fee 9.3% 8.1% 8.1% Market Share 13% 13% 19.9% Profit (Net Profit) $1.04bn ($0) $1.31bn (+$265 MM) $2.0bn (+$957 MM) Logistic Demand Model Market Share vs. Fee Profit vs. Fee 70% $2.5 Market Share S(P) 60% 50% 40% 30% 20% 10% 0% Profit (in billions) $2.0 $1.5 $1.0 $0.5 $0.0 ($0.5) ($1.0) ($1.5) Fee ($2.0) Fee WU 10K 33

34 Western Union Remittance Strategy Western Union Overview Remittance Market Overview Problem Identification Reach Costs MTOs Banks Informal FinTech Analysis and Comparison of Segments Recommendation: Physical-Digital Integration Impact Risks Timeline 34

35 In a competitive, dynamic environment, successful implementation is challenged by a number of risks Reduction in Margins Third-Party Business Performances Customer Confidence in Brand Physical Security of Third-Party Locations New and Increasing Regulations Stellar s Cybersecurity Price reductions reduce margins and adversely affect financial results in both short term and long term if transaction volumes do not increase sufficiently. Poor performance of third-party businesses may impair their ability to provide services to Western Union and have a potential impact on Western Union s own business. Insufficient professional qualifications, knowledge or skills in money transfer services of third-party agents may damage the reputation of Western Union and confidence in brand Third-party locations that have low security protection such as 7- Eleven and Starbucks may be more vulnerable to thefts, robberies and other criminal activities Additional regulations such as customer identification, agent due diligence requirements, enhanced recordkeeping or transaction monitoring may be difficult to comply with Stellar s virtual system and its own digital currency lumens are at risk from hackers, malware and operational glitches that could result in huge losses Source: Western Union 10K 35

36 Western Union Remittance Strategy Western Union Overview Remittance Market Overview Problem Identification Reach Costs MTOs Banks Informal FinTech Analysis and Comparison of Segments Recommendation: Physical-Digital Integration Impact Risks Timeline 36

37 By leveraging Western Union s current resources, this strategy can be implemented by the end of 2017 Implementation Timeline Phase 1 Joint Venture Proposals Q Reach Out and Confirm Physical Partnerships Secure Partnership with Stellar Review Regulatory Compliance Phase 2 Product Development Q Trial at Selected Stores Integrate WU/ Stellar Engineers Beta Test Platform Phase 3 Official Launch of New Strategy Q Marketing to Target Countries Offer Discounts to New / Loyal Customers Record Data on Platform Performance Phase 4 Long-Term Planning 2018 Beyond Profit Optimization Expand Into Rural Markets Expand from C2C to B2B Successful Implementation Grow market share, reduce costs, and mitigate FinTech threat 37

38 Conclusion Identified Problems In Western Union Remittance and Segment Analysis! Western Union s remittance business struggles in reach and cost! The most attractive strategy involves entering the FinTech segment of the market " The FinTech segment is the fastest growing segment, and has the lowest costs " Many consumers in developing countries only use digital platforms Western Union Remittance Strategy: Objectives, Implementation, and Addressed Risks! Western Union should integrate physical and digital partnerships " Partnership will stellar builds a digital platform, reducing costs by 25% " Partnerships with Oxxo and Safaricom give physical locations to withdraw cash! Implementation of strategy is achievable by the end of 2017! Potential security, regulatory, and implementation risks have been addressed Summary Western Union is the largest player in the international remittance business, but is losing its market to FinTech players. To combat downward pressure on fees, Western Union should integrate digital and physical partnerships to reach greater markets in developing countries and decrease costs associated with sending money. 38

39 APPENDIX 39

40 Appendix 1: Details and Assumptions for Recommendation Impact Calculations WU 10K Data Calculated Data (WU Specific) Transaction Fees $3,221,000,000 For Ex $1,057,100,000 Other Revenues $65,800,000 Total Revenue $4,343,900,000 Operating Expenses $3,301,364, Operating Income $1,042,000,000 Operating Margin 24% Remittance Market $553,701,000,000 WU Market Share 13% WU Fee 9.30% WU Remittance Volume Remittance Market * Market Share = $71,981,130,000 Realized Remittance Rate Revenue / WU Remittance Volume = 6.03% Realized to Fee Scaler Remittance Fee / Realized Remittance Fee = Total Remittance Fees WU Remittance Volume * Remittance Fee = $6,694,245,090 Realized Remittance Fees WU Remittance Volume * Realized Remittance Fee = $4,343,900,000 Realized Operating Income Operating Margin * Realized Remittance Fee = $1,042,536,000 Cost of Sending $1 Operating Expenses / Remittance Volume = $ Marginal Revenue/$1 Sent Realized Remittance Fee = $ Income/Dollar Sent Cost of Sending $1 Marginal Revenue/$1 Sent = $ Income Income/Dollar Spent * WU Remittance Volume = $1,042,536,000 Cost Reduction Calculations Costs Reduction (Assumed) 25% New Cost of Sending $1 (1-Cost Reduction) * Cost of Sending $1 = $ Desired Income per Dollar Spent Income/Dollar Sent = $ Target Marginal Revenue Cost of Sending $1 + Desired Income/Dollar = $ New Realized Remittance Rate Target Marginal Revenue = 4.89% New Remittance Fee Scalar * New Realized Remittance Rate = 7.53% Solution Calculations Fee Realized Fee S(P) Revenues Costs Profit Last Fee + (WU 1 / (1 + Exp(100 * (Fee Realized Remittance Fee * Realized to (Realized Remittance Fee Remittance Market * S(P) * Remittance Market * S(P) * Fee Min Fee) / 15 = Fee Scalar = * ) / 100))) = Fee = Other Revenues = Revenues Costs = $5,789,822, $3,790,757, $1,999,064,