WMT: Just How Much Will Walmart Squeeze Western Union, MoneyGram?

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In the grand scheme of things, it should come as no surprise that Walmart (WMT) is diving into the money-transfer business.

walmart-wmt-moneygram-western-unionThe world’s largest retailer has been cashing certain types of checks for years, established an ownership relationship with prepaid credit card name Green Dot (GDOT) in 2007, waded deeper into the prepaid card game by partnering with American Express (AXP) to unveil its prepaid credit card venture called BlueBird in 2012, and has since established its so-called in-store Money Centers as an alternative to banks by offering payroll deposit and bill-pay services.

The next natural step in that progression was adding an offer to wire cash from one party to another within its network of Money Centers.

Yet, the news still seemed to catch most investors off guard.

When WMT announced the new service Thursday, shares of both Western Union (WU) and MoneyGram International (MGI) — the latter of which actually already offers cash-wire services inside many Walmart stores — tanked on the news. WU stock fell 5%, while the value of the much more vulnerable MGI stock plunged more than 17%.

Of course, the questions that investors should be asking themselves now are (1) does this really matter, and if so, (2) who really wins and loses?

WMT: A Potent, Though Limited, Competitor

Beginning on April 24, Walmart will transfer cash from one store to another for customers wishing to wire money long distances to another party. Better still, WMT will perform the task at prices considerably lower than prices charged by the likes of Western Union or MoneyGram. In some cases, the savings might be as much as 50%.

A guaranteed game-changer for the money transfer business? It’ll certainly change the landscape, though it might be hyperbole to assume this is an industry Walmart is going to dominate and redefine the way it has value-retailing.

For starters, while Walmarts seem to be everywhere, there are fewer than 5,000 Walmart stores in the United States, and the “Walmart-2-Walmart” service will only be available domestically. Western Union, on the other hand, has more than half a million stations spanning the globe, while MoneyGram mans 35,000 stations in the U.S. and a few thousand more overseas. Although Walmarts are common, they’re not everywhere, and they might not always be as accessible as the alternative wire transfer service providers.

Walmart’s service also will cap an individual’s transfers to $900 per day … much lower than the limits imposed by MoneyGram and Western Union.

Still, if cost is a factor, it’s going to be difficult to compete with Walmart’s new venture.

Winners & Losers

As for why WMT is bothering getting into the money wiring business into the first place…

Many have opined that loading up a store visitor with cash inevitably leads to greater merchandise sales. It’s not an off-base theory. Although WMT has stated this isn’t the end-goal of adding Walmart-2-Walmart to the list of financial services its stores offer, it’s difficult to believe the benefit of cash-flush visitors didn’t cross management’s minds during the planning stages.

There’s another possible reason, however — a more direct reason that Walmart is adding wire transfers to the menu.

There’s actually some money to be made in cash conveyance (even at the $4.50 and $9.50 flat rates Walmart plans to charge). Although it’s not the only service it offers, wire transfers made up the bulk of Western Union’s $5.54 billion in revenue last year. MoneyGram is predominantly a cash transfer business, and it drove $1.47 billion in sales in 2013.

While Walmart won’t win all of that business, it could reasonably carve out a decent slice of it without much additional cost; the infrastructure is already in place with the company’s existing Money Centers. Indeed, the more financial services WMT offers, the more likely the company is to sell a whole myriad of such services to an individual.

And if Walmart happens to fuel a few more merchandise sales thanks to added foot traffic, then so be it.

With that being said, WU stock holders only have a modest worry on its hands in the shadow of Walmart-2-Walmart.

Western Union reports that only 8% of its revenue is driven by domestic money transfers. The majority of its top line is the result of international cash transfers, where it won’t be forced to compete against Walmart.

MoneyGram International, however, is a different story.

MoneyGram can handle overseas cash transfers, but the bulk of its business is generated inside the United States. And worse, its partnership with Walmart alone drove 27% of the company’s 2013 revenue. While that relationship will technically remain in place through 2016, it’s tough to believe that 27% of the company’s annual sales isn’t in dire jeopardy.

The even bigger worry for MGI stock owners, however, should be that 95% of all Americans live within 15 miles of a Walmart store. When paired with a sizable cost savings compared to MoneyGram’s cash transfer rates, that might be enough to let Walmart poach a huge swath of MoneyGram’s regulars.

Bottom Line

Neither Western Union nor MoneyGram should be happy with Thursday’s news, but the latter is really in a pinch.

Walmart? A winner as usual.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2014/04/walmart-wmt-moneygram-western-union/.

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