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Wal-Mart Would Love to Serve This Global Niche

Reuben Brewer
April 23, 2014

Source: Flickr / efile989.

Earlier this month, Wal-Mart (NYSE: WMT) unveiled its new Walmart-2-Walmart money transfer service. With existing relationships that allow for check cashing, among other things, Wal-Mart is increasingly expanding its presence in the underbanked segment. That says a great deal about the growth potential of this niche, but perhaps even more about the growth potential of Wal-Mart's new service.

Sending cash
If you have a bank account and want to send money to someone else, you can just write a check. And if you are reading this, you probably have a bank account. But what if you didn't have a bank account? You'd have to send cash. The problem is that sending large amounts of cash through the mail is, at best, a risky proposition. The answer was a money transfer service like MoneyGram (NASDAQ: MGI).

MoneyGram has over 330,000 locations in more than 200 countries. It highlights the fact that, according to the World Bank, roughly half of the world's adult population has limited or no access to banking relationships -- an incredibly large demographic. If you have trouble believing it, remember that the United States is among the wealthiest nations in the world -- many other countries aren't that lucky.

This massive underbanked population helps explain why MoneyGram's revenues have gone up each year since the 2007 to 2009 recession ended. In fact, after a long string of red ink, MoneyGram made $0.73 a share last year. Money transfers account for nearly 90% of revenues.

However, Wal-Mart's new service is a big problem for MoneyGram. Wal-Mart is MoneyGram's largest agent, accounting for a little over a quarter of MoneyGram's top line. No wonder MoneyGram's shares plummeted on the news. With so much riding on one corporate partner that just turned into a competitor it's understandable that investors would hit the panic button. In fact, it's probably prudent to avoid MoneyGram until the impact of Walmart-2-Walmart is clear.

MGI Chart

If it works, expect a global push
For Wal-Mart there's little risk in this trial balloon. For starters, it's still working with money services like MoneyGram. So if the new service doesn't take off, no harm no foul. If it does, then Wal-Mart has a new business line to exploit.

And based on Wal-Mart's always aggressive pricing, it's likely that customers will make the switch. For example, the retailer estimates that it can save customers between a quarter and $0.50 on transfers of up $50. Not much, but customers can save over $60 on transfers as high as $900—that's real money. The drawback, of course, is that customers have to come into a Wal-Mart to send and receive money.