Case: Going down the wire in the Money- Transfer Market

Long known as the fastest way to send money, US based Western Union controls nearly 80% of the money transfer market and is widely used and acknowledged as the world leader in wire transfers- electronic transfers of funds from one financial institution to another. However, Western Union is now facing stiff competition from banks threatening to encroach on its market share of the electronic-money business.

Western Union was started in 1851 when a group of businessmen in Rochester, New York, formed a printing telegraph company. The name of the company was changed to Western Union in 1861 when it first completed transcontinental telegraph line. Western Union introduced its money transfer service in 1871 and started offering the service outside North America in 1989. Today over 2, 75,000 Western Union agent locations are found in over 200 countries and territories around the world. Money transfers account for over 80 per cent of Western Unions revenues, and about $50 billion is transferred annually through Western Union.

Customers have many different options when sending money through Western Union. Money can be sent in person at an agent location, over the phone, or online, and senders may use cash, debit cards or credit cards. For example, to send money to Ukraine using a Western Union agent location, the customer must fill out a Send Money form. He or she then receives a receipt, which includes a Money Transfer Control number. This number must be given to the person receiving the funds. The receiver fills out a receive Money form and presents the Money Transfer Control Number along with valid identification at a Western Union agent location in Ukraine to receive the money.

CONVERTING CURRENCY

The funds are converted into the foreign currency using an exchange rate set by Western Union. The transfer fees of sending money is determined based on how much money is sent, in what form it is sent (cash/debit or credit card), and where it is going. For example, sending $500 to Mexico from California costs $15; sending %500 to the Philippines from California costs $32. Part of Western Unions attractiveness is its speed and anonymity. Western Union can move

cash from one location to another in just minutes and requires no ID, background check or bank account.

THE MEXICAN CONNECTION (I)

It is estimated that each year over 80 million migrant workers send more than $100 billion to their native countries. Most of Western Unions wire transfer business is in the United States comes from Mexican emigrants who send part of their payback home to support their families. In 2006, Mexico received at least $23 billion in remittances, making it the largest host country in Latin America for remittances followed by Brazil. The Inter- American Development Bank estimates that remittances to Latin America and the Caribbean could rise from $62.3 billion in 2006 to $100 billion by 2010. Remittances already exceeded foreign direct investment and overseas aid as sources of foreign exchange. Annual remittance income has passed tourism to become the second largest source of foreign-exchange income in Mexico after oil revenues.

EXCHANGE RATES AND COMPETITION

A class lawsuit was filed against Western Union in 1997 charging that Western Union offered its customers lower exchange rates than the market exchange rates without informing them of the difference. The lawsuit was settled in 2000, and Western Union is now required to state on its receipts and advertisements that it uses its own exchange rates on transactions and that any difference between the company rate and the market rate is kept by the company. For example the market exchange rate as on May 16, 2007 for Mexican Pesos was 10.8012 pesos/USD. Western Unions offered exchange rate was 10.54 pesos/USD. Financial Institutions such as banks have pressured Western Union to use better exchange rates. Profit Margins in the money-transfer business can reach 30 per cent, and many banks have started to offer their own money-transfer services in an attempt to take advantage of the continued expected growth of the foreign-money transfer industry. For example in 2001, Wells Fargo agreed to accept a consular identification card from Mexican immigrants who have to open a bank account but lack a U.S. drivers license. This card verifies Mexicans identities without revealing their immigration status. After Wells Fargo began accepting the consular identification card , the number of bank accounts opened with the consular ID jumped by over 500 percent within three years.

THE MEXICAN CONNECTION (II)

Wells Fargo and other US banks, including CITI and Bank of America, have established alliances with Mexican banks to offer remittance accounts to the emigrant workers in the United States. Workers can now open a US bank account with their consular ID and ask for two ATM cards. They can then deposit remittance money in the US account, and their family members at home can withdraw the money from the associated Mexican bank.

In 2005, the Federal Reserve teamed up with Mexicos central bank to create a new program that facilitates remittances made from the United States to Mexico. This program allows U.S. commercial banks to make money transfers for Mexican workers through the Federal Reserves own automated clearing house, which is linked to Banco de Mexico, the Mexican Central Bank.

Even the wire transfer fees at banks are cheaper than Western Unions. For example, Wells Fargo charges a $5 fee to send $500 to Mexico compared with Western Unions $15 fee for the same transaction. Many banks are moving towards eliminating exchange-rate spreads (the difference between the market rate and the rate they use for wire transfer) and transfer fees to Mexico to provide more attractive alternatives to migrant workers.

This new onslaught of competition by banks has forced Western Union to cut its fees and offer new services, including a home-delivery service, where money is delivered directly to the recipients door. Western Union is also moving into countries such as China and India to increase its market share. The increased competition has driven down remittance fees around the world. In Ukraine, for example, Western Union was forced to drop its fee from $43 to $20.

THE MEXICAN CONNECTION (III)

Migrant workers complain about the high transfer fees and exchange rate spread associated with the Western Union, but many continue to use this service instead of the lower cost method of remitting money through banks. Mexico has a history of unstable currencies and widespread inflation, resulting in traditional mistrusts of banks. Other immigrants base their choice on word

of mouth or convenience and location. Many are simply unaware of the variety of choices available for sending money and do not know how to get the best deal.

Another reason why many continue to use Western Union is the worldwide availability. For thousands of tiny villages, Western Union is the main link to the outside world. For example, Coatelco is a small Mexican Village south of Mexico City with no bank. A few people grow maize, chilies and fruit but remittances mostly from agricultural or construction workers in Georgia and the Carolinas-account for 90 percent of the villagers income.

Changing money from one currency to another and moving it around to different parts of the world is the serious business, both on a personal and a company level. To survive, both MNES and small import and export companies must understand foreign exchange and exchange rates. In a business setting, there is a fundamental difference between making a payment in the domestic market and making a payment abroad. In a domestic transaction, companies use only one currency. In a foreign transaction, companies can use two or more currencies.

MONEY TRANSFER MARKET The money transfer at the moment currently runs to well over $250 billion and is set to continue to grow further. Currently the growth rate is at 10-12% per year with no signs of slowing. This is mainly due to increased globalization, more migrant workers and the increased efficiency and security of money transfer companies. There are a variety of methods to transfer money overseas. Here we will outline a few of the main methods. 1) Cash Transfers. This method is by far the most popular and most transfer companies will allow you to transfer money online making it a very convenient method for money senders. If you choose to transfer cash physically you will have to find a company with their own agent located in both your country of sending and the country where the money will be collected. Online money transfers have seen a growth in popularity recently as customers confidence in their security increases. The major advantage of such services is that money can literally be sent at the click of a mouse. Prices can be researched online and you can do it all without leaving your armchair. On the downside verification procedures can often be a bit long and drawn out

whilst there may also be a gap in times sometimes days if you have to transfer the money and then have it downloaded into a local bank account. That said online money transfers are very popular. Money senders are usually provided with some sort of money transfer reference number which they then pass on to the recipient who then quotes this number in order collect the money. It is also highly likely that they will be required to present some sort of formal identification, this often has to be a passport. Online money transfer services also often provide extra services such as message sending services, frees sms messages and so on. In fact the array of services being made available and is growing all the time. 2) Money Orders. Most major Post Offices and Postal departments are able to issue international money orders however these tend to have a few restrictions. For example there is often an upper limit-on the amount of money you can transfer at one go. The money order once received then has to be exchanged for cash at a local Post Office of bank. as usual full personal details are required of both the recipient and the sender and of identification valid identification must be presented at both ends of the transfer. The sender should also make sure they hold of receipt the receipt, this is often a carbon copy and would need to be presented in the event of there being a problem with the transfer. Of course there are always charges associated types of these types of money transfers. 3) Bank Transfers. This method may well be one of the easiest ways to send money. the actual process tends to differ from bank to bank so if you wish to pursue this option you should contact your main bank branch for details. However these services do also usually take longer a than online transfers. Another option with banks of course is to simply send a cheque. The main problem with this is that the recipient may have problems cashing the cheque in their part of the world and it may also take a long time for the cheque to finally clear. The recipient would also have to pay a fee to the bank cashing to cheque which is not always the cheapest option. If you are thinking of sending a check abroad there are a few things you should always remember. It would take about a month to two to get the check cleared. Sending a check is surely easy but it is not easy to get it en-cashed by the recipient. And what is more the recipient also has to pay the processing fee to the bank locally. A further option would be to have money wired to the recipient. You need not be a customer of the bank to use this service however you would need to pay for the service up-front. This service

is generally reasonably quick and quite cost efficient. So there you have a quick overview of the different types of money transfer services available. Everyone will have different preferences for what they deem more important for their money transfer so it is important to shop around to see company suits your needs best. Here are some of the better known online money transfer companies: kobo, Western Union, ICICI, Money Gram and E-gold. Remember that whilst a reasonably priced service is always nice to find it is not always the most efficient service. With that in mind have a look around and see what is best for you.