Western Union (NYSE: WU ) has a competitive advantage based on network, scale, brand, and regulations. Increased global migration and a large percentage of the unbanked in emerging markets are creating significant demand for money transfers. Western Union meets this demand with convenient, flexible, cost-effective money transfers.
Western Union has a durable moat
Western Union's competitive advantage derives primarily from the network effect and its scale, but also from brand and regulatory barriers. Its network of more than 485,000 agents in 200 countries is the largest in the industry. To put that in perspective globally, for every McDonald's restaurant, there are more than 15 Western Union vendors. Additionally, Western Union processes about four times the transactions of its closest competitor, MoneyGram (Nasdaq: MGI ) . The Western Union brand is the most recognized in the industry.
Labor is moving toward highest return
Human labor commands seven times the price in the top 43 nations. This has created huge incentives for labor to move to its highest return. The United Nations estimates that there are 214 million migrants across the globe, an increase of about 37% in two decades. Their ranks grew by 41% in Europe and 80% in North America.
"There's more mobility at this moment than at any time in world history," said Gary P. Freeman, a political scientist at the University of Texas. Also, labor movement isn't flowing just from emerging markets to the U.S. and Europe. Singapore, Hong Kong, UAE, Brunei, Kuwait, Taiwan, Bahrain, Oman, and Saudi Arabia are all among the top 43 in GDP per capita; as a group, those countries will experience emigrants and migrant workers from Africa, the Indian subcontinent, and Asia. According to World Bank estimates, officially recorded remittance flows in 2010 totaled over $440 billion worldwide. That's a big market! And, Western Union only has 20% market share, which indicates significant room for growth.
And money sent home needs to be in cash
According to McKinsey, half of the world's adults -- more than 90% of whom live in Africa, Asia, and Latin America -- are unbanked. Furthermore, most transactions in those countries take place in cash. Thus, ACH transfers will not work, so money sent home needs to be converted to cash so that it can be spent.
Western Union is able to transfer $200 cash in the United States across the globe for a transaction fee of 3%-6%. Based on the alternatives, the fees seem very reasonable. If the sender is banked, he or she could mail an ATM card or credit card home. In this case, the cost would include bank fees for the sender, and ATM fees for sender and buyer (about $3-$5 each, or $6-$10 total). Additionally, there are currency exchange costs. Visa (NYSE: V ) and MasterCard (NYSE: MA ) typically charge 1% for foreign currency transaction, and banks pass that cost to consumers, often with an additional 1% tacked on for good measure. In other words, Western Union costs the same or less, and Western Union offers significantly more flexibility. Senders and buyers can choose to send and receive in cash, debit, credit or a combination.
Foolish bottom line
Western Union has structural competitive advantages; its service is in demand; and, best of all, it's trading at less than 10 times earnings.
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