Western Union Co. WU might see another massive invasion into the money remittance industry by the cryptocurrency Libra, which is set to be launched by Facebook, Inc. FB and its partners in this venture.
Recently, the social networking company unveiled its final plans to launch a universal currency, called Libra, by 2020, with backing from founder members comprising technology companies, marketplaces, blockchain technology providers, venture capitalists and non-profit organizations.
Libra would be a much more stable currency than bitcoins and will be backed by real assets, including bank deposits and short-term government securities. The virtual currency, therefore, can be used in the payments industry.
Facebook’s Libra might disrupt the money remittance industry by rewriting the ways and means by which money is remitted across the globe presently. Libra is initially aimed to target the underbanked areas of India and Sub-Saharan Africa, where financial services are not readily available and people don’t have easy access to banks and money transfer centers.
According to the World Bank, remittances to low- and middle-income nations grew nearly 10% year over year to $529 billion in 2018, with Southeast Asia and Sub-Saharan Africa regions being prominent. Remittances to low- and middle-income nations are expected to exceed $550 billion, bringing immense potential for the industry to pluck this low-hanging fruit.
The disruption in these areas could be fast, as the currency would enable cross-border money remittance, without third-party authentication, at a lower cost and great speed and security. This would shield customers from the cumbersome process of money remittance via banks and money transfer centers.
With the launch of Libra, the toil of standing in queues in front of the physical stores of Western Union, which operates between the normal business working hours can be eliminated. It will also do away with the requirement of having a bank account for fund transfer.
Libra’s focus on the underbanked areas can eat into Western Union’s Consumer to Consumer (C2C) business from the MEASA region, which constituted nearly 15% of the segment’s total revenues in 2018. Revenues from this region declined 4% in 2018 but transactions grew 1%.
Western Union has been facing softness in domestic money transfer business due to stiff competition from tech savvy companies such as Square, Inc. SQ and PayPal Holdings, PYPL.
Investors, too, seem to have taken a note of the constant investments that Western Union has to make in order to keep its business model relevant in the changing remittance industry, at a time when the top-line growth is in low-mid-single digits.
The stock has gained a mere 4% compared with its industry’s growth of nearly 70%, in two year's time.
We believe a difficult path lies ahead of Western Union. Even if a fraction of Facebook’s 2.37 active users worldwide uses the money remittance service via Libra, it will instantly hurt Western Union’s business.
Western Union carries a Zacks Rank #3 (Hold).
You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.
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