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.
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.
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.
But that's where the opportunity lies, too. For example, in the United States Wal-Mart has over 4,200 stores. Those stores attract less affluent individuals, see heavy traffic, and are well located. Sure, that doesn't compete with the 55,000 domestic locations that MoneyGram has, but if so much of MoneyGram's business comes from Wal-Mart, clearly location is more important than headcount.
Now, however, consider that Wal-Mart is the world's largest retailer. It has over 6,100 equally well-situated locations outside of the United States. If it can make the U.S. money transfer business work, it's definitely going to take this show on the road. And Wal-Mart operates in some key underbanked nations like Mexico, India, and China (over 2,600 locations combines, though most are in Mexico).
If you didn't buy in before, you might now
Serving the underbanked is a niche that's starting to go mainstream. Wal-Mart has used partners in the past to offer bank-like services to this group, but now its starting to reach out directly. That's horrible news for money transfer partner MoneyGram, good news for customers, and a massive blinking light for you to take a closer look at the underbanked segment. Wal-Mart isn't the only big name expanding in the space.
Reuben Brewer has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.