Growth From India Can Propel Western Union and Xoom

According to a report by the World Bank, India's inward remittances are estimated to surge to a record $71 billion this year. China is expected to follow with $60 billion worth of remittances -- placing India as the world's largest market for inward remittances.

The report also suggests that India's inward remittances can reach $85 billion in 2015 -- a spectacular 9.4% annual growth rate. So, companies like Western Union (WU 1.42%), Xoom (XOOM.DL), and MoneyGram (MGI) could witness a fantastic growth in their transaction volume over the coming years.

A beaten-down giant
When it comes to money transfers, it's hard to miss Western Union. It dominates the Indian remittance industry with an estimated market share of 80%. So naturally, its huge exposure to India makes it one of the prime beneficiaries.

To further strengthen its position in India, Western Union recently teamed up with Kotak Mahindra Bank -- one of the fastest growing Indian banks -- to operate as its business correspondent. This move allows Indian expatriates to remit funds directly to any Kotak Mahindra bank account in India without the need to visit agent locations. This move is expected to connect several rural areas in India, and eventually boost Western Union's transaction volume in the country.

But despite its growth prospects, shares of Western Union have been under pressure lately. Management expects its compliance related expenditures to rise by 200bps in 2014, because of the anti-money laundering and fraud prevention measures. And its shares plunged shortly after management stated that its operating profits could remain flat in 2014.

However, the recent weakness in its shares presents an investment opportunity. These compliance-related investments are to be made only in 2014, and once these investments are made, its compliance-related expenses should retreat back to normal levels, which means Western Union can continue to grow from thereon. So, investors can consider accumulating its shares with a long-term view.

A rapidly-growing peer
Xoom is another beneficiary here. It has been offering an inexpensive and speedy way to transfer money in India for over a decade. The company doesn't operate with any physical agent locations, and it facilitates direct bank-to-bank transfer of funds across international borders. This saves the cost of setting up agent locations.

Furthermore, a comparison table by entryindia.com displays that Xoom has a relatively inexpensive fee structure compared to Western Union. This competitive advantage has propelled Xoom's growth so far, and will continue to do so, until Western Union lowers its transfer fees. But I doubt if its competitive pricing structure is enough to displace Western Union's consumer-to-consumer services.

Xoom offers only bank-to-bank transfers while Western Union allows both: bank-to-bank transfers and transfers from agent locations. So naturally, Western Union's extensive reach in the country -- with over 100,000 agent locations -- boosts its convenience factor. And Western Union's recent tie-up with Kotak Mahindra Bank further expands its bank-to-bank transfer network.

So, it would be unwise to think that Xoom's pricing advantage is enough to dislodge Western Union from its top spot.

A company to avoid
MoneyGram is another company facilitating international fund transfers in India. However, after speaking to one of its agents in India, I'm confident its business is headed for obsolescence.

MoneyGram does not facilitate the direct transfer of remittances to bank accounts in India. So, its customers have to visit agent locations in order to receive funds. Furthermore, if the remittance value exceeds Rs. 50,000 (about $820), MoneyGram will write a check instead of handing out cash. After this step, customers have to visit their banks to cash their checks or transfer the funds into their bank accounts.

This tedious procedure is a major deterrent to MoneyGram's adoption, as consumers looking to save time will choose instead either Western Union or Xoom. Moreover, MoneyGram's network of about 45,000 locations in India is about 55% smaller than Western Union's. So, consumers might find it hard to locate MoneyGram agents near them.

Since MoneyGram solely relies on physical locations, it needs to expand its network and be accessible to the 1.23 billion people living in India. But its lofty debt of $845 million and minuscule net income of $49.2 million (trailing 12 months) prevents it from spending cash open-handedly. And until it expands its network, I don't think MoneyGram will pose a threat to Western Union or Xoom.

Final words
I believe the growing remittance industry allows both Western Union and Xoom to coexist and grow at the same time. Where Xoom offers an inexpensive way to remit funds, Western Union offers extensive connectivity to many rural areas in India. So, holding both the companies -- with a long-term view -- would be a great way to spread the risks and rewards. However, for the mentioned reasons, it may be best to avoid MoneyGram.