Banking the Un-Banked

It's paradoxical but true: First Data Corp., one of the nation's quintessential high tech companies, gets its fastest, most reliable growth from a low-tech subsidiary, Western Union Financial Services. That's the same Western Union formed in the 1850s to exploit a hot new technology known as the telegraph.

Vestiges of that long-ago era can be seen at First Data's Atlanta headquarters, where a room is reserved for Western Union memorabilia, including copper wire from an early trans-Atlantic cable and a glass-domed stock ticker machine. Presiding over this mini-museum is a portrait of Samuel Morse, inventor of both the telegraph and Morse code.

Today's Western Union no longer depends on the telegraph to zip money around the world, of course. That's now done through electronic and information networks managed by computers. And to that extent, at least, Western Union fits into First Data's overall electronic payments business. But compared with credit card processing or e-commerce, wire transfer is still a pretty low-tech affair. A typical customer will walk into a grocery store in some American city, find the Western Union booth, and hand some cash over to the agent for transmittal to a relative overseas. Although the information is routed through a central data center, there are no credit checks or complicated settlement procedures; the relative just picks up his cash at the other end.

Simple it may be, but Western Union provides First Data with a steady, predictable stream of earnings that buttress the company at a time when its core business is under pressure. Revenues in the payment instruments group, which is predominately Western Union, grew 21% in 1998, compared with 6% growth at card issuer services and 0.1% at merchant processing services. "Western Union is humming along and will continue to do so," says Fox-Pitt Kelton analyst Norman Jaffe. "It's the engine for growth at First Data as it becomes the bank for un-bankable households."

The Federal Reserve estimates 22 million U.S. households fall into the "un-banked," or cash-based category. Add to that the hundreds of millions of people in foreign lands who also lack access to bank accounts and you have a vast pool of potential customers for wire transfer services. As the best known company in this business, with some 36 million names in its customer database, Western Union enjoys a virtual monopoly position, although companies such as MoneyGram do offer some competition.

Given the built-in demand for its services, Western Union's main challenge is to keep expanding its agent distribution network. Since the company now operates in virtually every U.S. city, that mostly means expanding overseas, where its business is growing 50% a year. Western Union maintains 74,000 facilities in 172 countries and anticipates reaching 100,000 locations within the next five years.

First Data is also adding some new technology to the mix. A software product called Z-cash will allow customers to deposit money for other people to withdraw at a time and place of their choosing. Under this system, which will soon be implemented on a trial basis, the customer deposits some money with Western Union and arranges for the funds to be made available to a relative or friend using a specific PIN number. The recipient can then withdraw the money from any ATM anywhere in the world that is equipped with the Z-Cash software.

First Data CEO Ric Duques views the system as an opportunity to vastly expand Western Union's distribution network. "If you install it in 200,000 ATMs worldwide, you've just added 200,000 agents to the Western Union network," he says. But since the business case depends on getting a huge number of ATMs equipped with Z-cash software, Duques still has to convince banks that the additional fee income they might earn is worth the cost of installing the software.

- Kenneth Cline

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