In late 2003, Global Payments Inc. completed its purchase of Dolex Dollar Express (Dolex) for approximately $200 million, reflecting the first major foray by a U.S. transaction processor into the cross-border money-transfer market other than First Data Corp.’s long-standing ownership of Western Union. In 2002, Dolex processed 4.6 million transactions and generated revenues of about $70 million. This makes Dolex the fourth-largest money-transfer company in the U.S., trailing only Western Union, MoneyGram and Vigo.
The Global Payments/Dolex acquisition raises a number of questions for other transaction processors. Should other processors also be pursuing opportunities in the money-transfer industry? And if so, what are the potential market-entry strategies for them? Cross-border money transfers represent a very attractive industry. The market opportunity is huge—by some estimates more than $150 billion in transfers were made in 2003. Transfers from the U.S. alone are estimated to be well over $50 billion per year, including $32 billion per year from the U.S. to Latin America and the Caribbean.
The money-transfer market is projected to continue to grow rapidly— estimates of industry volume growth range from 10% to 15% or more per year. This projected growth is driven by several factors, including continued immigration from less developed to more developed countries and increased governmental scrutiny of informal moneytransfer networks.
Western Union and MoneyGram are the 800-pound gorillas of the industry. Both have established huge domestic and overseas agent bases.
The rest of the industry is highly fragmented, with many smaller niche players and new entrants.
Although increased competition has caused money-transfer fees to decline in certain payment corridors, industry pricing remains quite attractive. Fees often range from 5% to 15% of the amount transferred. As a result, many industry players have operating margins in excess of 20%.
Dolex currently is focused on a particular niche—transfers from the U.S. to Latin America. More than 80% of Dolex’s transfer volume is from the U.S. to Mexico. Unlike most other U.S. money-transfer companies that operate through agent relationships with thirdparty merchants, Dolex primarily uses its own network of over 600 retail branches in the United States.
Dolex has been more aggressive than other money-transfer companies in issuing identification cards to its customers. Dolex customers swipe these cards through readers before initiating transfers to load their information more rapidly and efficiently. Dolex reports that about 300,000 of these cards are in active use and that customers use them in over 80% of transfers. Dolex also cross-sells other products to its customers, such as money orders and prepaid cards.
Global Payments, Dolex’s purchaser, operates in the U.S. and Canada and had $516 million in revenue in its 2003 fiscal year ended May 31, 2003. In its initial entry into overseas markets, Global Payments recently closed its acquisition of MUZO, the largest payment processor in the Czech Republic. Global Payments derives about 98% of revenue from its merchant-acquiring and check-verification and guarantee businesses. This business primarily targets mid-market merchants with $150,000 to $3 million in annual bank card charge volume.
Growth Prospects
Several factors likely drove Global Payments’ decision to acquire Dolex. The primary rationale likely was the revenue growth and margin opportunities in the money-transfer industry generally and with Dolex specifically. Dolex provides Global Payments with the opportunity to diversify into an attractive industry through the acquisition of one of that industry’s leading companies.
Global Payments’ projections for Dolex’s financial performance compare favorably to the rest of Global’s businesses, which generally have experienced solid revenue growth and good margins. In fiscal 2003, Global Payments’ revenues grew 8% over fiscal 2002, excluding the impact of certain acquisitions and foreign currency fluctuations. Global Payments projects that Dolex’s growth rate will be in the low teens, which will likely be higher than the rest of Global’s business lines.
Comparisons of industry growth rates also are favorable. Sales-volume growth in the U.S. merchant-acquiring industry is estimated to be in the high single digits. By contrast, annual growth in transfers in the U.S. money-transfer industry is estimated to be 10% to 15%.
In fiscal 2003, operating margins in Global’s existing businesses were approximately 18%. Global Payments projects that Dolex’s operating margins will be in the high teens. More recently, Global Payments noted that Dolex currently was slightly dilutive to its operating margins due to Dolex’s high fixed-cost operating model of owning U.S. retail branches. Global Payments also stated that Dolex’s operating margins should improve as additional volume flows through its branches.
A Rare Opportunity By purchasing Dolex, Global Payments immediately acquired a significant presence in the U.S. money-transfer industry. Global Payments also obtained an experienced management team and an existing operations and technology platform. Given the limited number of large money-transfer companies available for acquisition, this was a rare opportunity for Global Payments to acquire a significant industry presence and a strong platform in a single transaction.
Global Payments has stated that it intends to move quickly to build on the Dolex platform. The company already has accelerated Dolex’s growth by aggressively adding new retail branch locations— some 25 in fiscal 2004’s third quarter ended Feb. 29, with a projected 15 more each quarter going forward. In addition, Global Payments has mentioned several times that it is interested in further accelerating this growth through acquisitions of smaller U.S. money-transfer companies.
Although money transfers are very different from merchant processing— for instance, transfer companies need state money-transmitter licenses— Global Payments may be able to leverage its skills and expertise in the areas of electronic payments and transaction processing. Similarly, Global Payments may be able to utilize some of its capabilities and experience in managing merchant relationships and point-ofsale equipment.
Distribution Channels
Global also may be able to leverage some aspects of its merchant distribution channels. Its merchants are potential candidates to be Dolex money-transfer agents and vice versa.
In practice, however, cross-selling other services has proven very challenging for merchant acquirers. This difficulty is likely to be compounded by Dolex’s distribution model of primarily using its own retail branches instead of third-party merchant relationships. Nonetheless, Global may be able to obtain some synergies from these distribution channels and at a minimum should be able to offer some of its products—prepaid cards, for example—across both businesses.
A transaction processor considering whether and how to enter the moneytransfer industry must recognize the differences between the prevailing business models in the money-transfer and merchant- acquiring industries. Most money-transfer companies use a closedloop network. Such a network is comprised of proprietary groups of agents or employees in both the transfer-originating and transfer-receiving countries. Closed-loop networks generally are not accessible by, or shared with, any other transfer companies.
Closed-loop networks are very different from the so-called open-loop networks that acquirers are familiar with in the U.S. credit and debit card industries. Both the Visa and MasterCard networks are open-loop networks that are accessible by, and shared with, other members of the applicable card association. Thus, acquirers can establish relationships with merchants knowing that Visa and MasterCard cardholders will be able to make payments at these merchants even though the acquirer has no direct relationship with these cardholders. The implications of the closedloop money-transfer model are significant for transaction processors considering whether or how to enter this industry. Unlike the U.S. credit and debit card industries, each money-transfer company must build or buy its own proprietary network of both originating and receiving locations. Companies cannot elect to build only one side of the network.
Although some transfer companies have taken limited steps towards creating an open-loop network, there is no sizable open-loop network operating today. As an example, Vigo, through its arrangement with the World Council of Credit Unions, allows U.S. credit unions to transfer funds to other participating credit unions or Vigo agent locations overseas. This arrangement enables American credit unions to offer money-transfer services to their customers by piggybacking on Vigo’s infrastructure and, where desired, its overseas agent network. Vigo’s network, however, currently is not open to other industry participants.
Card-Based Models
In addition, some companies have adopted card-based money-transfer models—Bank of America’s SafeSend card and Citibank’s Money Card. These companies establish proprietary relationships with transfer-originating consumers and enable them to load value into a stored-value account. The companies then issue a stored-value card to money-transfer recipients overseas. The recipients can use these cards to make purchases or withdraw funds from automated teller machines in their home countries using the Visa, MasterCard or electronic funds transfer networks.
As a result, recipients can access cash at a wide variety of existing locations. Money-transfer companies using cardbased models can therefore minimize the need to build their own network of receiving locations overseas. There is also at least one early-stage company currently in the marketplace— Philadelphia-based PayQuick— that offers companies an outsourced money-transfer processing service and shared infrastructure. In addition to leveraging this shared infrastructure, participants may open their networks of transfer-sending and/or receiving locations to other companies in order to generate fee income.
Leveraging Expertise Other transaction processors should strongly consider entering the moneytransfer industry for the same reasons that Global Payments did. The primary reason would be to diversify into an adjacent industry with strong long-term growth and margin opportunities. As a whole, the money-transfer industry is growing more rapidly and has higher margins than the credit card processing industry. Any transaction processor seeking to enter the money-transfer industry will need to carefully consider the differences between the money-transfer and payment card industries. Nonetheless, processors should be able to leverage their skills and expertise. Many processors also will be able to utilize their capabilities and experience in managing merchant relationships and POS equipment.
Processors also may be able to leverage aspects of their distribution channels to cross-sell or make referrals for merchant services and money-transfer services. Given the historical challenges processors have faced in successfully cross-selling other products and services to their merchant customers, however, processors should be careful not to overestimate sales opportunities.
In any event, there are likely a number of products that transaction processors can offer to both merchant-acquiring and money-transfer merchants. These products would likely include prepaid/ stored-value cards.
Any processor seeking to enter the money-transfer industry will need a carefully conceived strategy that takes into account two key market conditions: (1) the closed-end network model that currently prevails in the money-transfer industry and (2) the lack of large companies available for acquisition. Potential market-entry strategies would include the following:
• Acquire an Existing Mid-Sized Company. Given the current composition and ownership of the large companies in the money-transfer market, it will be very difficult to acquire one of the larger (i.e., top four) players. A more feasible strategy would be to buy one of the three to six remaining mid-sized transfer companies in the U.S. that already have built a strong transfer-originating and receiving network. First Annapolis estimates each of these companies has $5 million to $50 million in annual revenues. It also will be important that the target company have strong management, technology, and operations. By acquiring a mid-sized player, a transaction processor would obtain a solid platform for both organic growth and consolidating acquisitions of other money-transfer companies.
• Acquire a Small Existing Company. Another entry strategy would be to purchase a small money-transfer company with a limited network and likely less strong management, technology, and operations. There may be up to 50 such companies, which average below $2 million in annual revenues. Although this approach involves the lowest upfront capital outlay, it presents increased risks associated with building the initial network, management team and the needed technology. In addition, depending on the strength of the platform of the purchased company, the processor may limit its ability to grow rapidly via consolidating acquisitions.
• Build a New Network for Transfer Origination and Piggyback on an Existing Network for Transfer Receiving. This is the lowest-cost and lowest-risk approach to entering the money-transfer business. The key challenges are the need to start from scratch and the need to find a suitable partner willing to provide access to its transferreceiving network on acceptable terms.
The key advantage is that the transaction processor can specialize and focus on building an originating network without the added burdens of trying simultaneously to build a transferreceiving network.
• Build a New Network for Both Transfer Origination and Receiving. This is the most challenging of the potential market-entry strategies. The processor essentially would need to start from scratch in simultaneously building the originating and receiving agent networks as well as the necessary management team, technology, and operations. Although possible, this strategy presents a high likelihood of failure due to the amount of work and focus required to get the business going.
There are tremendous opportunities for transaction processors that are able to enter the money-transfer industry successfully. Any processor considering entering this industry, however, needs to carefully analyze and understand its unique business models and characteristics. By doing that and developing a clear and well-conceived entry strategy, the processor can optimize its likelihood of success and capitalize on the opportunities in this attractive industry.
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