If Western Union is right in estimating that 2 billion people are unbanked and under-banked worldwide, that's 28 percent of the Earth's population who, by definition, even global behemoths like JPMorgan Chase and Deutsche Bank don't reach. Western Union's customer database, therefore, is of "enormous value," Ersek says. "You can't imagine."
For example, analyzing the behavior of so many under-the-radar consumers tipped Western Union off to the developing financial crisis in 2008, he says. Customers were sending less money in the average transaction and conducting fewer transactions, the data showed. This prompted Western Union executives to revise their financial expectations and warn Wall Street six months before others in the financial industry caught on, he says. "These customers are totally different than customers that typical financial companies serve," he says.
It's hard to say whether Western Union and competitors like MoneyGram unfairly exploit the unbanked, according to Servon.
Western Union also hedges currency exchange rates, profiting from the difference between what it paid when it bought a currency and the rate it charges customers when they come into a store. This foreign exchange revenue is a growing part of total sales—24 percent in 2012, up from 21 percent in 2011.
The company also charges fees for many popular transactions. For example, it costs a customer $10 or $12 to send $100 from New York to Slovenia, or $5 to send $100 from Boston to Manila using a credit card. Some transfers are free to the sender and receiver (for example, during a promotion), but Western Union still makes money from the currency exchange rate.
"If you look at cost relative to income, [these customers] spend much more on financial services than you and I," Servon says. "But I don't know that there's any way else to send $100 to Philippines every two weeks."
Actually, there are many ways, if Western Union's patent portfolio is any indication.
IT for Better Business
As with its "magic eye" high-speed fax machine in the 1950s, the company is trying to stay ahead of customers, to offer them more choices when they're ready. In just the past two years, Western Union has obtained 52 patents for inventions, including various kinds of mobile transactions, refundable prepaid transaction cards, and a system that lets you transfer money using the wireless technology in your car.
Last year, the company got a patent for technology that transmits fingerprints, facial geometry and other biometric data during a financial transaction. Sometimes, birth certificates, identity cards and other documents for verifying identification are scarce, as in remote areas of the Philippines. There, Western Union won permission from regulators to use fingerprints instead.
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