Introduction

Square-Off: Is Raising the Minimum Wage a Good Idea?

Raising the minimum wage won big last November. A handful of states passed legislation to significantly hike pay floors across the country, which may represent a building sea change in public opinion away from business interests. From New York City to Seattle, the "Fight for $15" is increasingly becoming a reality. Twenty-nine states and the District of Columbia now have higher minimum wages than the federal mandate of $7.25 an hour. Advocates of the hikes say the wage floor has lagged far b ..

Western Union, the 160-year-old money transfer and payments company, operates across 200 countries and territories through 450,000 agents. Its consumer customers are largely migrant workers sending earnings back to their family in their home country. So changes in employment levels worldwide, tighter government controls on immigration, political unrest, and exchange-rate instability can all have a substantial effect on the company’s earnings.

But Western Union’s global scope is also a big benefit. While unemployment in the United States has been persistently high, the World Bank recently increased its forecast for remittances in developing countries to $349 billion, and estimates volume of $404 billion in 2013. Indeed, there are still plenty of greenfield opportunities for Western Union: other than the United States, no one country represents more than 6% of the firm’s top line.

In addition, Western Union is developing channels in online and mobile money transfer, stored value cards, and business-to-business payments. To broaden its reach in the market for cross-border payments between small and midsize enterprises, for example, in June the company announced the purchase of the global business payments division of Travelex Holdings Ltd.

CFO recently spoke with finance chief Scott Scheirman about the favorable and unfavorable trends for Western Union and how the company manages a laundry list of risks. An edited version of the interview follows.

Despite high unemployment in the U.S. and elsewhere, long-term global economic trends are in your favor in some ways.
As we look at the macro trends, we firmly believe the income gaps between developing and developed countries — what you can earn in Italy versus Romania, or in the U.K. versus China, or in the U.S. versus Mexico — are huge. You might earn $10 a day in one country when you can earn $10 to $15 an hour in the U.S. or in Italy. So we believe that income gap is going to be wide for decades. And the other factor we see is aging populations. In parts of Europe and Russia, populations are aging, and migrants are going to have to continue to come to those countries to perform services.

In addition, Western Union is developing channels in online and mobile money transfer, stored value cards, and business-to-business payments. To broaden its reach in the market for cross-border payments between small and midsize enterprises, for example, in June the company announced the purchase of the global business payments division of Travelex Holdings Ltd.

CFO recently spoke with finance chief Scott Scheirman about the favorable and unfavorable trends for Western Union and how the company manages a laundry list of risks. An edited version of the interview follows.

Despite high unemployment in the U.S. and elsewhere, long-term global economic trends are in your favor in some ways.
As we look at the macro trends, we firmly believe the income gaps between developing and developed countries — what you can earn in Italy versus Romania, or in the U.K. versus China, or in the U.S. versus Mexico — are huge. You might earn $10 a day in one country when you can earn $10 to $15 an hour in the U.S. or in Italy. So we believe that income gap is going to be wide for decades. And the other factor we see is aging populations. In parts of Europe and Russia, populations are aging, and migrants are going to have to continue to come to those countries to perform services.

But from a corporate-finance standpoint, whether the U.S. dollar is strengthening or weakening, we want predictability of cash flow and earnings. It’s hard to predict where currency rates will be 3 months or 12 months from now. Our strategy is twofold. One, we have receivables and payables — money we owe to our agents for money-transfer transactions or money that agents owe us. So we enter into short-term transactions to hedge those receivables and payables. Two, whether it’s from Germany or the U.K. or another country, we have to translate revenues and profits from the sterling or the euro or another currency back into U.S. dollars. We hedge the currencies 12 to 24 months in advance. On a full-year basis in 2011, if the European currencies move — pick whichever direction you want, up 5% or down 5% — that would impact our top line by $55 million. But the bottom-line impact would only be about $7 million, because we’ve effectively hedged our net cash flows.

Did you have any issues with the political unrest in the Middle East?
We were closed in Egypt for probably about a three-to-four-week period in February. We do business in the Ivory Coast, and from roughly about mid-February up until [mid-May], our business was not operating there. And then we actually do some limited business in Libya. That market went down about mid-February and it’s still closed. If you do business in 200 countries, there’s always going to be some political hot spots.

So how do you mitigate political risk?
Generally, nonfinancially. Some countries are “sending” markets. So we have a receivable from that agent that we have to collect on a daily or a weekly basis. Other markets receive funds, so you forward them money to make the payout. Part of our enterprise risk management is understanding the geopolitical risks, and then, as we think about receivables with agents, [the question is] how far do we want to go with a receivable balance? What’s our risk tolerance?

On top of all that, you have new U.S. financial regulations coming down the pike.
For remittance companies, they announced what the rules might look like in May. We’re very supportive and believe the rules they’ve announced are very workable. I feel like we do very well today with transparency and disclosure. If you send money to Mexico, you get a receipt that would have the terms and conditions. It would say that you paid — I’ll make up the numbers — $10 to send $300, and your brother in Mexico City would receive 12 pesos to the dollar as an exchange rate. The other thing we do with that transaction is what we refer to as “fixed on send.” When you put your $300 down on the counter, we confirm and lock in an exchange rate. If we tell you it’s 12 pesos to the dollar, when your brother goes to get pesos, he gets 12 pesos to the dollar.

Each country has its set of regulations. But that’s where I believe Western Union brings a lot of strength. We have over 400 people focused on regulatory and compliance activities. We’ll spend over $40 million a year doing that.

 

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