Why Western Union and MoneyGram Investors Shouldn't Panic

NEW YORK (TheStreet) -- Walmart (WMT) will launch its new money-transfer service Thursday. What will this mean for long-time stalwarts Western Union (WU) and MoneyGram (MGI)?

Walmart has the size to make it in this business and will offer low transaction costs, but that doesn't mean doom for the traditional players although MoneyGram does operate out of Walmart stores.

The service, which allows consumers in the U.S. to transfer money up to $900 to any one of the 4,000 domestic Walmart stores, is a smart move on the part of Walmart because it will help drive store traffic.

However, the impact on Western Union and MoneyGram won't be as huge as the investment community projects. Here's why.

The Walmart service will only be made available in the U.S, which means only the U.S. segment of Western Union and MoneyGram that will feel the impact. Both of these companies have a strong multinational presence. In fact, North America is not even the largest portion of their revenue.

In addition, both companies have strong agent networks, which is their biggest asset in this case. Western Union and MoneyGram, as of the end of 2013, have 500,000 and 336,000 agent locations across 200 countries, respectively. None of these agents will automatically start using Walmart's payment service.

In fact, these agents would reduce the extent to which Walmart can gain entrance into the U.S. money transfer market. I mean, customers don't have a choice with Western Union and MoneyGram agents that use the services of these companies as a part of their businesses.

For instance, Axcess Financial, the operator of Check 'n Go with over 1000 locations in the U.S., has a deal with Western Union. The introduction of Walmart's service will have little to no effect on how the financial services provider does its business.

Let's look at the annual reports of these companies.

Percentage distribution of MoneyGram's total money transfer transactions for the years ended December 31.

 

2013

2012

2011

U.S. to U.S.

30 %

31%

32%

U.S. to Outbound

36 %

35%

35%

Originating outside of the U.S.

34 %

34%

33%

Source: MoneyGram

The table above shows that about 70% of MoneyGram's total transactions are either directed to go outside the U.S., or don't even originate from the U.S. at all, so there is nothing Walmart can influence. In addition, MoneyGram's dependence on U.S.-to-U.S. transactions has been on the decline, albeit growing its revenue. If the company can continue to do this, the entry of Walmart shouldn't pose any major problem.

The same thing applies to Western Union.

Consumer-to-Consumer revenue as a percentage of consolidated revenue

   

Europe and CIS

21%

22%

North America

19%

20%

Middle East and Africa

16%

15%

APAC

12%

12%

LACA

9%

9%

westernunion.com

3%

3%

Source: Western Union

As the table shows, Europe and CIS (Commonwealth of Independent States) contribute the most to Western Union's total revenue. Note that its Consumer-to-Consumer segment contributes about 80% of its total revenue. The beauty of Western Union's business is its extended reach. As the table shows, Western Union isn't over-reliant on any region. This could help neutralize the effect of Walmart's payment services.

So investors in these two companies need not panic.

At the time of publication the author had no position in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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