Smile :) Is Western Union is About to Have a Kodak Moment?

Smile for the camera Western Union investors, let's see if this is a Kodak moment for you.

You remember Kodak, the iconic film company? Neither do we.

For decades upon decades Kodak served as the benchmark for film and processing, and its mighty brand carved a wide economic moat around its profit center.
Then, in a flash, they were obliterated by new technology (digital film) that passed their product by at the speed of light. (Funny enough, Kodak invented digital photography long before anyone else but kept it under wraps for fear of cannibalizing their cash cow.)

No Kodak investor should wistfully look back at that time with a pang of regret that they didn't sell; "If I only I had seen that coming ..."  No, they should be able to look in a mirror, diagnosis themselves as idiots, and shift their remaining capital to a no brain S+P index fund; it didn't take 20/20 forward vision to see this coming.
The same could be said for Blockbuster Video.

What about present day Western Union (WU)? For over a century they built a trusted brand name, synonymous with speed and trust, and combined with their network of physical locations/agents acted as huge barriers to entry, and thus they were able to extract monopolistic prices mostly from impoverished, often unbanked expats remitting money back home.

Today WU has much more competition, from Xoom all the way to Bitcoin. And yes, all these are eating away at Western Union's marketshare and profits, the question is, will any of these competitors be able to put Western Union out of business like the above examples?
Let's just dive in and examine the two competing products with a fighter's chance of taking out WU, as many people have been projecting for the last several years.

Bitcoin/ Crypto-Currency
videoWill Bitcoin destroy Western Union?

"Be your own bank. Send money via the internet at far far lower costs using the blockchain, frictionless."
Absolutely, a wonderful theory. Here's the problem:
You cannot easily spend bitcoin. Yes, a few places take bitcoin here and there as a form of payment, and maybe it will eventually become the world's reserve currency, but for the foreseeable future you still have to buy and sell bitcoin in local currency, which adds friction and cost.  
Also, the adoption of new services always has to hurdle consumer inertia, which in this case is compounded by money being an arena where people are naturally cautious.
Basically, until you can spend bitcoin as easily as fiat currency, crpyto knocking out WU remains wishful thinking.


video: Facebook money transfer versus Western Union

A service which is used ubiquitously and daily throughout the world can simply advertise their own money transfer service to a very targeted group, and attain new customers at a next to zero cost. With margins approaching 0% for online money transfers, Facebook could operate at an incredible low margin, while using their behemoth weight to reduce foreign exchange expenses, and use these reduced expenses to potentially overcome the inertia barrier, 
The challenge is: 
1) you need a debit card for this feature, both to send and receive. Many people remitting money do not have them.
2) As Facebook is not trying to make a profit from payments, the feature is designed to
     a) to keep their platform sticky
     b) to get debit cards on file which will further future commerce purchases by Facebook's members in the future.

While Facebook has both the global reach and overlapping customers as Western Union, they their goal is not to become a leader in payments. 

Red Tape
Government regulations meant to mitigate terrorism and money laundering are spurring both banks and new remittance (often bitcoin) players to reconsider costs-vs-benefits of servicing smaller money transfer providers.
This has had negative effects on Western Union as well, as they've faced substantial fines, and added friction with their clients (in the form of interviews with WU security teams,) but has also helped erect further barriers to entry.

WU moves to the web
Western Union also has a fairly developed digital platform, which partly enables it cut out its biggest source of expenses, agent commissions, and thus compete on cost.
Suffice to say, WU hasn't stood flat-footed to the increased competition.

The Verdict
While I believe there is far more downside than upside to Western Union stock, management is doing all they can to return capital to shareholders in the form of dividends and buybacks, the stock is sufficiently cheap that I can no longer recommend shorting it. 
That said, if Facebook ever posts a photo of Western Union in crosshairs, and decide to put their weight behind remittance payments, that could well be a Kodak moment for Western Union. 
Til then, just lay-off the stock and look for greener pastures.


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