“FX for the Little Guy” Western Union’s Small Business Payment Solution
Glenbrook’s Carol Coye Benson and Erin McCune are interviewing leading commercial payment providers and enablers to understand whether we’ve finally reached the ‘tipping point’ for B2B payments. This post featuring Western Union is the second of a series of interviews that we will be featuring here at Payments Views. You can learn more about the series and see a list of the other companies we will be speaking with here.
I recently spoke with Brian Harris, Vice President, Marketing and Product Management, Western Union Business Solutions, about the company’s business payment solutions, its new mobile application, and whether or not B2B payments have indeed reached the proverbial tipping point. I suspect that many Payments Views readers may not be aware that Western Union provides solutions for businesses because the company has historically focused on person-to-person, mostly cash-based transactions worldwide. However, in 2009 the company acquired Custom House, a Canadian-based cross-border payment provider, in order to provide cross-border payment solutions for small and medium-sized businesses. Brian joined Western Union as a result of that acquisition and is responsible for product and marketing, concentrating on building awareness of the company’s B2B offering.
Custom House was originally a retail money exchange provider, but over time the company shifted toward business payment solutions for small and medium-sized companies that, it felt, were underserved by banks. As Harris explained, the traditional correspondent-banking model connects local banks (sometimes through chains of several banks) to global banks that have an extensive international footprint, or correspondent relationships with banks in the destination country. As the transaction passes from bank to bank, fees are charged by multiple parties, and, at some point along the way, an FX transaction occurs.
As a result it can be hard for the sender of funds to predict the final amount that the recipient will receive. Harris said he has worked with many clients who were dissatisfied with the inefficiency, unpredictability, lack of transparency and often high costs of cross-border payments through their banks.
Addressing Cross Border Payment Needs of Small and Midsized Companies
As Harris explains the genesis of Custom House, smaller companies that wanted to initiate payment to receivers overseas needed more assistance than the Canadian banks could offer. For instance, in his view, a smaller business that seldom makes foreign transactions finds the typical bank approach confusing. More often than not, the business owner is required to visit the bank in person and the bank employee behind the teller line may or may not have more cross-border payment experience than the business owner. With assistance by phone or from another more experienced branch employee, the transaction is initiated after filling out and signing various forms. But the business owner, having left the bank, can’t be sure that the payment just initiated actually covers the amount of the invoice. This anxiety provided an opportunity for Custom House, and the solution is the foundation of Western Union’s business payment service.
This story illustrates a problem in bank management that we have seen repeatedly, and which we know frustrates our banker friends. Sometimes, the reality is the story as told above; at other times, the banks do have the services the customer needs, but the branch staff (or the online experience) does not adequately explain or deliver these capabilities. One friend of Glenbrook refers to this as “the arbitrage of information.”
Today Western Union Business Solutions pays out in more than 140 currencies in 166 countries and has more than 50,000 active clients. Two-thirds of them transact online. In 2010, Western Union Business Solutions’ revenue was $111 million – roughly 2% of Western Union’s overall 2010 revenue of $5.2 billion.
The small business is offered a spot transaction – a quote for what it will cost to send an exact amount of foreign currency. If the buyer wants to ensure that the supplier in the UK receives 10,000 pounds Sterling, he or she is quoted a price. There is always an FX component (e.g. it will take $16,023 to equal £10,000) plus a transaction fee component.
Harris explained that their customers value transparency – they appreciate understanding exactly what the cost is and how the cost is determined. And, he said, Business Solutions customers also appreciate the fact that the amount the receiver expects is the amount they will get. Often, however, the business is not terribly sensitive about the FX rate itself.
This makes a lot of sense to us. After all, the shipment of important raw materials or delivery of critical services may be at stake. The small business does not want to jeopardize its relationship with its supplier.
The Art of “Deliverability”
I asked Harris if Western Union is vulnerable to modifications on the other end – by correspondent banks and by the bank in the destination country. Apparently there is little risk, as Western Union partners with global banks that have a presence in the recipient countries and can initiate a domestic transfer in the exact amount.
This collection of bank networks – typically relying on two “decoupled” local bank transfers – relies on account-to-account transfers rather than correspondent banking. The initiating “pull” transaction from the buyer/sender to Western Union is nearly always a domestic bank transfer. Overseas, the “push” transaction from Western Union (or its bank representative) to the supplier/recipient is usually a local bank transaction but could be an International wire if the destination country is more exotic than usual.
Western Union can choose the best possible routing method (depending on the origination and destination country and currency) and quotes not only a price but the amount of time it will take for the funds to reach the recipient. Transactions in major currencies (US Dollar, pounds Sterling, Euro), clear the same day or the next day. Other countries may take longer, but in those instances, Harris observes that small business payment senders and receivers are less concerned with the timing than the fact that the funds will indeed arrive.
I asked Harris about exception rates for international payments. He assured me that Western Union experiences error rates well below industry norms. “All we do is international payments, so our back office is well-versed in the types of exceptions and how to proactively address them.”
What’s this payment for?
The Western Union business payment solution has notification capabilities to alert payment recipients that funds are en route and when to expect them, and provides a confirmation upon delivery. It is possible to send a limited amount of information with the payment.
Reader of Payments Views are familiar with Glenbrook’s myths and realities of B2B payments and know that the data accompanying a business transaction is as important as the money. This data, called remittance information (not to be confused with remittance P2P payments!) is a universal pain point: very few payment systems efficiently and elegantly deliver data along with payments. And even fewer payment processes ensure machine-readable data is delivered from system to system allowing “straight through processing” and auto-application of the payment against open receivables in the suppliers accounting system. Traditional correspondent banking via SWIFT and wires are no exception (at least for now). Any business oriented payment solution must effectively address the remittance challenge in order to gain traction.
Harris described an upcoming enhancement to Western Union’s business offering that allows delivery of remittance detail via email. He did explain that, even today, there is always a reference number that corresponds to the payment that is communicated in the notifications to both senders and receivers.
In the future, the recipient will receive an email with remittance details (e.g. “This payment is for invoices 001, 002, 003 and 004”) as well as the transaction reference number. The sender has to know the recipient’s email address in order for Western Union to facilitate the delivery of the remittance information. The additional details in the email will allow the receiver to log into the system and actively manage their funds.
I asked whether having the receiver’s email address was a challenge for paying companies. Harris said that in his experience, most B2B senders had this – in fact he couldn’t think of any instances where the buyer didn’t have the receiver’s email address.
Over time, Western Union will be working toward even richer capabilities to offer more in-depth reference information. In the current system, each payment sender has a profile and can view transaction history. There is a data warehouse to capture and store data for senders. But thus far, there are no corresponding data services for payment recipients.
The Importance of Being Send/Receive Agnostic
Western Union recognizes the lopsidedness of serving senders more effectively than receivers and is working toward building solutions that benefit both equally. The solution already features robust receive capabilities for the education segment in order to handle tuition payments for foreign students. The funds received by the college or university almost never match to the original invoice amount, so Western Union has an application that facilitates reconciliation. They have also developed corresponding send solutions that help the student (or the student’s parents) to initiate payment in with the right value of foreign currency in order to result in receipt of the correct tuition amount in the educational institute’s preferred currency. Harris described efforts underway to expand the education industry receipt solution to the broader SME market. He recognizes that they will “need some sort of portal or web-enabled research capability for the receiver.”
The “Chicken and Egg” Problem
Currently, Western Union’s primary relationships with online customers are with the senders of payments. The company processes payments based on the sender’s instructions (where and to whom to send the funds). Receivers of payments are not required to sign up for the service.
The company is building a model that will encourage receivers to sign up in order to obtain value-add reconciliation and reporting services.
Once Western Union has a relationship with both sender and receiver, Harris anticipates that it may be possible to “be creative in terms of offering value to the receiver,” potentially offering the ability, for example, to generate invoices and request payment. Similarly, most businesses are both senders and receivers, and do a little bit of cross-border activity in each direction, so many payment senders are also FX payment recipients and may appreciate a comprehensive solution for all their cross-border payment needs.
FX on the Go – Western Union’s Mobile Solution
There are mobile opportunities in nearly all payment contexts, and Harris emphasizes that small businesses in particular are well attuned to mobile payments. Business owners or finance directors with a broad range of responsibilities are seldom at their desks, in front of their computers. In fact, Western Union experiences peak traffic in their online channel after business hours. These customers are already relying heavily on Western Union’s online channel, and have embraced Western Union’s brand-new mobile solution. The ability to initiate FX payments from anywhere allows them to monitor rates and make pending payments when they see rates move in their favor.
Western Union deliberately developed a mobile-optimized website, rather than a device-specific application. The mobile solution has the same capabilities that business users access through the internet portal. Information stored in the sender’s online profile is available via the mobile browser, which acts as an extension of the online account. Buyers can access their stored vendors, transaction history, funding bank accounts, etc. so the process is nearly the same. Harris’ enthusiasm is clear: “We’ve had great signups – more than anticipated. Our existing customer base is very excited to have this mobile capability, with no learning curve.”
[Editor’s Note: If you are interested in having your B2B solution featured in this series, or just want to talk B2B payments with Glenbrook, let me know. – EMc]