Give Me Your Tired, Your Hungry, Your Cash ...
How Western Union turned a dying U.S. business—money transfers—into a runaway success for a booming market: Foreign-born workers.
By G. Pascal Zachary

(Business 2.0) – When Charles Fote decided to acquire Western Union in 1995, the deal didn't seem to make a whole lot of sense. After all, the fabled telegram company was just emerging from bankruptcy, its venerable messaging business nearly extinct. Even Western Union's more modern consumer service—moving cash from one part of the country to another—seemed to be on its last legs, done in by the spread of ATMs, credit cards, and other forms of electronic payment. Fote, meanwhile, was an executive vice president at First Data Corp., an $8.4 billion company that processes nearly 40 percent of credit card transactions in the United States and runs the nation's largest ATM network—in other words, the sort of business that had helped push Western Union toward the grave.

But Fote saw Western Union not as a dinosaur but as a "diamond in the rough." Impressed by the dramatic number of immigrants coming to the United States—about 1 million per year between 1980 and 2000—Fote thought he could reinvent Western Union around a new proposition: becoming the chief money-mover for foreign-born workers, one of the fastest-growing consumer segments in the country. Long ignored by most banks and businesses, U.S. immigrants send much of their savings to family members and friends back home.

Less than a decade later, it's clear that Fote, 55, made a very shrewd bet. Last year Western Union rang up $3 billion in fees on cash transfers, largely across national borders, earning an operating profit of $1 billion on an astonishing 81 million transfers in and out of more than 190 countries, from Botswana to Belize. On the strength of booming growth in the number of migrant workers around the world, Western Union doubled revenues from 1998 to 2003, along with a 150 percent rise in profit—accounting for about half of First Data's operating income.

Fote not only earned himself a promotion (he was named First Data's CEO in 2002) but also pulled off a remarkable feat: He turned one of America's best-known brands into a trusted household name among foreigners—a market that most U.S. businesses still haven't learned how to serve. "Bankers are struggling to understand this trend," says Dean Seifert, Western Union's vice president for product development. "We're riding it."

Who Says Cash Isn't King?

For years futurists have predicted the emergence of the "cashless" American society—and, for the most part, they've been right. (When was the last time you paid cash to fill the tank?) But in many parts of the world, cash remains king; even here in the United States it still accounts for 30 percent of retail transactions. Many migrant workers, moreover, lack bank accounts; their folks back home don't have them either. So both parties prefer sending and receiving cash.

Fote realized this as early as 1988, when, as an executive at American Express, he launched MoneyGram—a cash-transfer service that similarly catered to immigrants. But after several years, with little name recognition outside the United States, MoneyGram was still tiny compared with its 150-year-old rival. Thus, when Western Union became available after bankruptcy, Fote jumped at the chance to snap up a trusted brand known throughout the world. (Western Union, after all, provided telegram service overseas as early as 1873.) "I felt like I was trading a third-string quarterback for John Elway," Fote says.

Fote believed that the key to growth was to dramatically expand Western Union's presence—both in immigrant communities within the United States and in their home countries. The goal was to make it possible for cash senders to find agents easily and for recipients to get hassle-free pickup. The more Western Union agents he could bring onboard at the receiving end, the more cash would flow from senders in the States.

Expanding the Footprint

Fote quickly hit on a clever expansion plan. Instead of leasing or building branch offices, he began partnering with banks, post offices, and retailers—existing transaction hubs that had room to spare. Certified as Western Union agents, not employees, these partners took a small slice of the transaction fees, typically 1 to 3 percent. So-called super agents—usually post offices and large banks—could then manage their own groups of smaller agents and, like Amway or Avon sales reps, skim an additional percentage off the fees. (It's no coincidence that Fote chose a former Avon executive, Christina Gold, to take over as CEO of Western Union in 2002.)

When Western Union entered China in 2001, it signed up the national postal service as an agent and immediately added thousands of locations. It did the same in India, landing thousands more. In Jamaica, Western Union had just eight branches in 1990. Today it has 130 locations on the island, feeding an estimated annual flow of $1 billion to and from the United States. "Western Union has a Jamaican face—not just in Jamaica but in Jamaican communities in the U.S.," says Brian Goldson, who manages agents on both sides of the transaction.

Deals like these have allowed Western Union to drive growth in transactions and limit rivals' options by locking down the best partners in exclusive deals. Between 1998 and 2003, the number of Western Union agents more than tripled, from 55,000 to 170,000. That's a bigger global footprint than McDonald's, Starbucks, and Wal-Mart combined.

Market There, Profit Here

To promote Western Union in fast-growing money-transfer "corridors"—Brooklyn to Kingston, say, or Lisbon to Rio de Janeiro—Fote didn't hire a top-tier Madison Avenue ad agency to launch a campaign aimed at the company's U.S. customers. Instead he found immigrant experts (who work out of Western Union's New Jersey offices) to manage relationships with each country's super agents, such as China Post. Better yet, these experts help localize and tailor the marketing program for each locale—and get foreign agents to help foot the bill. "We hire a Senegalese to manage French-speaking West Africa, an Indian for India, Chinese for China," says Michael Hagerty, Western Union's chief marketing officer. That's why prices, advertisements, and products vary by country and region.

And it's another reason Western Union has prospered so dramatically: By focusing its marketing efforts on foreign countries, not the United States, it fuels demand where it exists—with cash recipients, not the senders. "Our center is the receive side," says CEO Gold. "You have a reverse focus because, for our customer, 'home' is not the U.S." Not surprisingly, targeted ethnic ad campaigns that Western Union uses in the United States are usually lifted wholesale from the countries where they originated—and worked. One example: For the last Chinese New Year, the company launched a print campaign in China that it later brought home without changing a word.

With few rivals and a reputation for delivering money swiftly and securely, Fote has enjoyed a coveted advantage: the ability to charge service fees of 5 to 20 percent on cash transfers, dramatically higher than banks charge. Even after agents take their cut, the rates still keep Western Union's profit margins at a sky-high 35 percent.

With runaway success, of course, come complaints of gouging. "Five years ago, Western Union was charging whatever the market would bear," says Donald Terry, a senior official at the Inter-American Development Bank. The Department of Justice is currently investigating Western Union's exclusive partnership deals, and the company has faced class-action suits over its failure to clearly disclose to customers that, in addition to fees, it earns money from converting one currency to another.

The complaints have fueled rivals. MoneyGram recently went public, and while it's a distant second to Western Union, it's leading a parade of smaller cash-transfer companies, many specializing in Latin America. In response, Fote has pushed Western Union to lower prices—by as much as 50 percent in some regions. The company is also unleashing new products, including a "loyalty card" to promote more repeat business and an online service that allows customers to send cash from their PCs, charging their credit cards for the transactions.

Ultimately, though, as Fote knows, the company runs a dying business. Agents taking in cash at one end and dispensing it at another will eventually be replaced by ATMs. And fees on global ATM withdrawals are roughly a fifth of what Western Union charges. Which suits Fote just fine. His company, after all, is one of the world's largest providers of the very ATM services that someday will make Western Union's cash transfers seem as quaint as telegrams.

Sharing the Wealth

A dramatic rise in the number of migrant workers around the world has triggered an unexpected growth business—cash transfers to family and friends back home.

[*]Figures are for 2001. Source: World Bank