Tag Archive for 'Money transfer'

Western Union and incomplete (financial) markets

Via Tyler Cowen, I came across a fascinating article at the New York Times:  “Western Union Empire Moves Migrant Cash Home.”  Tyler is bang on the money when he calls it consistently interesting throughout.  What really grabbed my attention was the last few paragraphs:

[Western Union] has an estimated global market share of 14 percent, versus 3 percent for its closest competitor, MoneyGram. Though Western Union has responded to increased competition by cutting its charges, it typically remains the most expensive service.

An Oakland group, the Transnational Institute for Grassroots Research and Action, began a boycott campaign in September, demanding that Western Union lower its prices and increase its corporate giving. But it has gained little traction, in part because of the company’s recent courtship of migrant groups.

One critic who now gives Western Union grudging credit is Donald F. Terry, an official at the Inter-American Development Bank. He has spent years trying to get more migrants to use banks, so they could establish financial histories and qualify for loans.

But banks have not fully welcomed migrants, he said, while Western Union and other money transfer companies have more locations, better hours and agents who know their customers’ language and culture.

“You could say they were ripping people off, or you could also say they’re providing a service that poor people desperately needed and were willing to pay for,” Mr. Terry said. “Any consumer company in the world would like to have the customer loyalty they have. They’re doing something right.”

I’ve always been a bit surprised at the rates that financial intermediaries are able to charge.  Whether we’re speaking about “instantaneous” money transfer ala Western Union, money lenders charging 80% (an usurer in the U.S., a life-changing charity in Africa), or the rates charged by bail bondsmen, they’re enormous.  Why?

To a large extent it’s surely to do with a lack of competition, but given the profitability of these ventures, why don’t we see new entrants?  Why don’t we see country- or even region-specific competitors to Western Union?  Where is the all-Spanish-speaking competitor that is staffed entirely with Latinos in the US working off a natural, built-right-into-the-community advertising mechanism?  Even with enormous risk premiums, lending money at 80% is much, much more profitable than putting it in a US-based deposit.  Why don’t people based in that developing country do it?

Update:  Okay, okay, the market isn’t incomplete if there are transactions taking place, but there are real economic profits being made here.  What are the barriers to entry that are keeping suppliers away?