Western Union’s Telegram to Silicon Valley: We’re Ready to Compete

Western Union built the first transcontinental telegraph line in 1861, offered the first telegraphic money transfer service in 1871, and became one of the first 11 stocks in the Dow Jones average in 1884. It invented the charge card in 1914, and launched the first fleet of commercial geosynchronous communication satellites in 1974.

In other words, Western Union is so old that it has participated in half a dozen major technological revolutions, from telegraphy to telephony to computers to the Internet to wirelessness. It’s also outlived almost every other company in its original mid-nineteenth-century cohort (San Francisco-based Wells Fargo is an exception).

So what is this relic of the Victorian era doing opening an office in San Francisco’s SoMa district, where the average company is still young enough to be wearing diapers? That’s what I’ve been wondering lately on my daily runs past the China Basin office building on Mission Creek, where construction crews have gradually been transforming Western Union’s first-floor space from an empty shell into a startuppy wonderland full of art, murals, and slick modular furniture.

A couple of weeks ago I got a chance to put my question to the executive in charge of the operation, Khalid Fellahi. The short answer is that Western Union is intent on being a leading player in the next era of digital cash and payments technology. The San Francisco office is the headquarters of Western Union Digital Ventures, or WU Digital for short; it’s a brand new division of the Englewood, CO-based company charged with reinventing and expanding Western Union’s legacy money transfer business for the mobile age.

Khalid Fellahi, senior vice president and general manager at Western Union Digital Ventures

It’s hard to fathom the size of the money transfer market. Some $400 billion of principal changes hands every year, mostly in the form of consumer-to-consumer remittances sent home to families by workers living abroad, and Western Union handles about a sixth of that, more than any rival.

Many of those transactions still begin and end in the form of cash, but digital transfers—those between credit-card or bank accounts in the 24 countries where Western Union has a Web presence—generate a growing percentage of the company’s revenue. Fellahi, the general manager of WU Digital, says his goal is to increase digital revenue from $100 million today to a minimum of $500 million by 2015.

To achieve that kind of growth, Western Union will have to stay ahead of upstarts like Xoom who want to wrest away more of the money-transfer market. And it will also need to position itself for a future where cash may gradually be displaced by an array of online, mobile, and “e-wallet” technologies from companies like PayPal, Google, and Square. That’s why the company decided to put WU Digital in San Francisco, where it will have an easier time keeping tabs on the competition and attracting talent, Fellahi says.

“We have to be much more nimble, much faster, up to Internet speed,” Fellahi says. “So we built a completely different structure here to make sure we were on a par with, or beyond, what our competition is doing in this space.”

The atmosphere at WU Digital was subdued the day I visited, but it was probably the quiet before the storm: so far there are only 40 people working in a space built to house more than 100. The company has dozens of open positions, and has been able to recruit employees away from some of the Bay Area’s hottest companies, including Google and PayPal, Fellahi says.

“We are looking at a very fast ramp-up,” he says. “We have marketing and business people sitting in Vienna and London and Australia and Singapore, but this is the design and innovation center. What we are trying to get here is the key talent that is going to be making sure we are designing the next generation of products that we bring to market.”

Much of the energy driving WU Digital will come from Fellahi himself. Born in Morocco and educated in France, he joined Western Union a decade ago and made his name running the company’s Africa operations. Mobile devices were sweeping the continent during these years, and when wireless operators such as Vodafone began giving mobile subscribers access to stored-value accounts several years ago, Fellahi pushed to get Western Union involved. Today, he says, WU partners with eight mobile operators in Africa, allowing subscribers in 14 countries to move money across borders into their stored-value accounts.

In 2010 Fellahi got a chance to apply what he’d learned in Africa as the head of WU’s Mobile Transaction Services group. Then in 2011, CEO Hikmet Ersek named him to lead the company’s new digital business. Fellahi promptly moved to San Francisco—where the company had no previous presence—and started laying the groundwork for the China Basin office.

Fellahi and I talked about everything from Western Union’s innovation strategy to the company’s business model in an era when it might have to look beyond money-transfer fees for revenue. Below is an edited transcript. (By the way, Western Union stopped handling telegrams in 2006, so apologies for the anachronistic headline—I couldn’t resist.)

Xconomy: What are Western Union’s big reasons for starting a new digital division?

Khalid Fellahi: We have this great asset of an extraordinary network around the globe, and we continue to build the fundamentals of our cash-to-cash business [where customers put down cash at a Western Union location to initiate an international transfer that terminates in cash at the other end]. The question was how do we accelerate our digital business, taking into account the assets we have? We are successful and will be successful only because of the combination of assets that we have. Even if digital is a small portion of our business today, we have the largest footprint of any money transfer company in the world. So how can we revamp our consumer experience and start investing in new technologies and new talent, products, and services that put us on a growth trajectory?

X: Why put WU Digital in San Francisco?

FK: After I took over the digital business in January 2011, the first six months were about rethinking all of our strategy, and we spent a couple of months with a task force right here in San Francisco to figure out the new trajectory of growth. Interestingly, we had nothing in San Francisco, not even an office. I took a bunch of apartments on Third Street and said, you know, we have to be in a place where we can think differently and go after talent, and that is easier to source here than anywhere else in the world. If you want to something in the digital space, you can’t make a mistake if you do it in San Francisco.

By the fourth quarter of 2011 we had a plan and an agreement, and by January of 2012 we had this office. It was just a shell, but I started hiring people right away, and we camped out here with about five or six people, the advance party, for four months. We started hiring, and while all of this was being remodeled we kept hiring and we haven’t stopped.

X: Most of Western Union’s business involves money transfers across international borders. Is San Francisco a good place to be based if you’re trying to figure out how to build a better mobile payment system for someone in Africa or Asia?

FK: I always go back to the basics. It’s about understanding the customer. For example, I talk to taxi drivers all the time. They’re usually from a different country. If I have a 20-minute drive, I talk to them, and I say, I see you have a Blackberry or an iPhone. Did you know that we have an app that will allow you to send money home while you are waiting at the airport for your next customer and it will take you five minutes the first time and after that it will take maybe 30 seconds? These people are already using their mobile phones for a lot of things—that is their life, they’re in a taxi, and suddenly they can do money transfer. The use case is obvious for them.

So when we look at our business we don’t look at it only from a U.S. perspective. It’s not about building tools that will be used in New York or San Francisco or Paris, it’s about the customer in Ghana or Kenya or Malaysia and what they will need in the digital space to make their businesses work, to send money, to receive money, to pay bills. I tell people, when you come here in the morning, make sure you have your passport—make sure you are talking and thinking about your customer in China or India or South Africa.

X: You joined Western Union back in 2002. What did the business look like back then?

FK: If you look at the business in 2002, we had less than 200,000 locations. We had an extremely solid platform that could move money from point to point across the world in minutes, and it worked in 190 countries. We had an extremely strong six-sigma culture, with Hikmet’s background at GE, and that meant executing a service for the customer had to be simple and flawless. We had a platform for moving money across 16,000 corridors—two-way connections like U.S. to Ghana or France to Morocco—in 135 currencies with agents who might be banks or postal offices or retail agents. And we had to make sure we were complying with all of the regulations in all of the countries, and actually in pairs as well, since the regulations can change depending on where you are sending to and from.

So that is the foundation of everything else we have done. Since then we have grown to more than 500,000 locations. I’m proud to say that in some of the countries I mentioned you can’t drive more than a minute without seeing a Western Union sign.

X: But I’m guessing that the underlying technology for all these corridors was not Web or Internet technology—more likely it was some kind of proprietary electronic data interchange system, right? How well were you positioned to adapt to the Internet and the mobile revolution?

FK: We do have this extraordinary platform that is the hub for moving money across the world from point to point. If you go back many years, that hub was based on a very simple technology, and when I started in 2002 we were still doing that. Say you you walked into a location in New York City and you said, “I want to send $300 to Kumasi, Ghana.” The guy in the location would pick up the phone, call the Western Union call center, and say, “Hi, I am X and here is my ID and I have just taken $300 from this customer and he wants to send it to Y in Kumasi.” The call center would log the information. On the other side, the person in Ghana would go to any location in Kumasi and the agent there would pick up the phone and call the call center and say, “Hi, I have somebody here who says he wants to pick up the transaction, and here is the number,” and the call center would say, “Yes, you can pay him.” Done.

Of course, that evolved into having a terminal in the two locations that would connect to our hub in various ways. It could be through a telephone modem over a dialup connection, or any form that was available. Then it evolved some more and we started using the Internet as the primary way of connecting. But it’s still the same thing: it’s connecting to a host that is doing all the work, with a relatively thin application at the point of sale. Today most of our applications are browser-based, and we have an extremely powerful system for routing a transaction anywhere in the world in a matter of minutes, while making sure we comply with regulations about money laundering and how much money you can move. At the end of the day, money transfer relies on that very solid core system that can transfer money across 200 countries in 135 currencies.

X: Not long after the rise of PayPal, we saw the advent of other Silicon Valley companies like Xoom that were explicitly out to disrupt Western Union in the area of international money transfers. Is keeping those competitors in check part of the idea behind WU Digital?

FK: Of course, we are always looking at the competition, but I wouldn’t say that it’s Xoom or PayPal or anyone in particular. I’m looking at each one and making sure I understand what the competition might be doing that is better than me in terms of addressing customer needs. So what is driving our investment and our strategy is the customer. Xoom has their own business and has been around for some time, but are they disrupting our business? You can look at the facts—today we have an online presence in 23 countries. No one else has that, not Xoom, not any of the other competitors that I know. Globally we have 16,000 corridors [between countries] and 5,000 of them are online, and our biggest competitors only have 30 or 40. So my portfolio is very different.

X: What kinds of payment-related trends in Silicon Valley are interesting to you?

FK: I will give you an example: Jumio is a very interesting company that allows you to use video streaming to do card recognition when you are doing some transaction online. A lot of online business is about knowing who is on the other side, in “card not present” situations, where you want to mitigate the risk of somebody trying to use somebody else’s card. These are the kinds of things we want to incorporate into our technologies.

We acquired a startup in October that we thought was interesting. It was called eBillMe and we renamed it WuPay. In the e-commerce space, there is a problem with customers who have the ability to pay but get declined for some reason. WuPay generates an invoice and sends it to your online banking system, where you pay the invoice as if you were paying a bill, and we provide the funds to the merchant. It means you can pay for Internet shopping from 17,000 banks in the U.S. We are also enabling people to walk into a location and pay cash for something they bought online.

X: Silicon Valley has an age-old dream of a cashless economy, although the things that we’ll supposedly use in place of cash seem to change every few years. Right now everyone seems to be excited about NFC-equipped smartphones. Does Western Union want to play in that world?

FK: We don’t say no to anything, but we focus on what we are best at. In the short term, our business is about moving money and storing money. We’re in the pre-paid business and the money transfer business, and the first, basic thing is to provide accounts to people and say you can start storing money, moving money, and receiving money. Then you can do something with these accounts like paying bills. That all builds on something we already have. The most important issue with pre-paid cards or e-wallets is having a network for topping up these things, which we already have. So we are more in the spirit of saying, how can we complement other partners in the value chain rather than trying to displace them.

X: Today Western Union has a very simple revenue model: you charge the sender a fee for all money transfers. Will you have to think more carefully about how to make money in a mobile- and Web-centric world, where you’re offering other kinds of services, and where consumers have an expectation that many services will be inexpensive or free?

FK: If the cost of the value you are providing is close to zero, then of course you are going to charge zero. But when you look at the value we are providing, for the foreseeable future that is going to be very difficult to provide for free. When you move money today, the reality is that for the next three to five years, cash is going to be present at one of the endpoints. I come from one of these countries where cash is king. Charging for that service is normal; who you charge and how much are things you can discuss. Also, cross-border transfers, compliance, dealing in multiple currencies—those are all things that a customer is willing to pay for. That does not mean we are not looking for other models. But when I look at our core market, where I want to grow to $500 million, the model is not going to change significantly.

X: You mentioned the Western Union smartphone app. Are you going to have a lot of people here working on other mobile products?

FK: Between now and 2015, when I look at our channels, the Web is still going to be very important, but mobile is growing in importance. When we look at new products and services today we start thinking mobile even before Web. There is a blurring, where HTML5 will bring a mix of [native] apps and Web-driven apps. But what we have to do is make sure we keep growing or evolving the front end, to give customers the best experience and make sure we keep up with the latest, best practices.

Wade Roush is the producer and host of the podcast Soonish and a contributing editor at Xconomy. Follow @soonishpodcast

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