Western Union (NYSE:WU) is a classic name in the history of the United States. Despite its iconic past in telegrams, today its big business is money transfers. And a key customer group is the underbanked. However, sending money from point A to point B isn't the only service that the underbanked need. That's where retailers like Aaron's (NYSE:AAN) come into play.
It ain't easy being bankless
With limited or no access to a bank, the underbanked are at a severe disadvantage. Paying bills, getting credit (loans), cashing checks, and even proving residency can be difficult if not impossible. But these are things that happen every single day in our lives. For the 20% or so of Americans that the Federal Reserve classifies as underbanked this poses a big problem.
Western Union helps with that, offering numerous options for sending and receiving money. For example, you can send money, receive money, pay bills, and even get a Western Union branded pre-paid credit card. Increasingly, dealing with Western Union means using the Internet or a cell phone instead of one of its over 500,000 global locations.
Money transfers are still the big business at Western Union, accounting for 80% of 2013's $5.5 billion in revenues (bill pay was 11% and business-to-business transactions came in at 7%). However, the notable shift is probably on the electronic side, which made up 5% of the company's transactions last year, up 25% from 2012.
According to the Federal Reserve, "Sixty-three percent of unbanked consumers have a mobile phone, and 91 percent of underbanked consumers have a mobile phone." These consumers may have limited access to banks, but they aren't skimping on modern technologies. And modern technology is where money transfer companies like Western Union are looking for growth both domestically and abroad.
A telling statistic
But the fact that so many of the underbanked have cell phones when they don't have bank accounts says a lot more than you might think. These consumers aren't doing without to get by, they are making financial choices about what they want. Clearly modern technology is a winner.
Cell phones, obviously, are on the list of necessities, but what about more mundane things like computers, tablets, televisions, and game consoles. Western Union can't help you with that. But Aaron's can. And it does so using a rent-to-own model. Essentially, Aaron's is providing its customers a loan backed by the asset being bought. If you don't pay, Aaron's takes its Galaxy tablet back. If you pay, you get to keep it forever.
Aaron's has done a solid job building its business, with top line growth every year over the past decade. Unfortunately, that hasn't always translated into bottom line improvements. For example, earnings fell nearly 30% last year as the company faced both industry wide issues and company specific troubles.
Aaron's is proactively working to resolve its internal problems. The external issues, like bad winter weather, are harder to deal with but impact competitors, too. The really big news, however, is that Aaron's is set to acquire Progressive Finance Holdings for $700 million.
Today Aaron's sells products out of over 2,000 owned and franchised stores. Progressive works with other retailers so that customers can use rent-to-own in more traditional stores, like Big Lots, Mattress Firm, and Sleepy's. The company expects the addition of Progressive, "will open at least 15,000 new doors as sources of revenue for Aaron's."
In other words, Aaron's is using the Progressive purchase to become the rent-to-own service provider for companies that don't traditionally provide rent-to-own. That has the potential to transform Aaron's from a retailer to a quasi-financial company serving the underbanked.
More than just finances involved
Companies like Western Union are a direct play on the underbanked niche. However, there's more than just bank services involved when you look at the underbanked. Like people with banking relationships, the underbanked are consumers of everything from computers to desks. That's where a company like Aaron's comes in. Aaron's is in a transition, but expanding its model to provide rent-to-own services to other retailers could materially alter its fortunes for the better.