The Internet-savvy generation may deem that Western Union provides service of the past, but in fact it still has a strong presence in the international transaction world. You will see Western Union signs in most countries because it offers a vital service for the migrant work force. You are still able to walk into an agent with cash, initiate transfer, and the recipients can receive cash from another agent thousands of miles away, sometimes almost immediately, without anyone having a bank account in either country.

The convenience comes with higher cost, therefore people who are used to the modern banking system usually do not have Western Union on their radar. To compete with modern technology and continue growing its market, the company has entered into the realm of Internet banking and partnering with banks to provide money transfer service, which allow you to send cash to another country online from your US checking account. This benefits us globetrotters greatly, especially if you are heading to a cash-based society with low banking penetration.

So how come Western Union was able to conduct international transfers and hand out cash instantly without going through banks? The trick lies in its use of agents. A Western Union agent needs to hold a certain amount of cash reserve at the beginning of the day, and use its own money to pay out the transfer claims. In return, the agent takes a small transaction fee. The cash reserve may also increase when customers come in to initiate transfers with cash. These transactions are recorded electronically in Western Union’s online system. At the end of day, Western Union uses its local bank account to settle with the agent any advance or excess cash outlay the agent had made, after the agent kept its fee. Western Union then nets its accounts in each country, and at its discretion will move the funds across countries using international wire transfers to balance its overall corporate account.

It’s as if Western Union is everyone’s middleman. You give him $2,000 in one country and he gives you $2,000 back in another, minus some fee for his trouble. This can be considerably more efficient than having two banks actually making a transaction of $2,000 for you. It just turns out that more parties need to be paid- Western Union and two agents, one in each country. In addition, Western Union historically charges a premium on handling cash transfers because it has the pricing power toward people without banking access, and because cash transfers bring about more identity theft and money laundering concerns. To compensate for the potentially higher risks and costs, Western Union charges a fixed handling fee and a less favorable exchange rate to its customers, and splits it with the agents involved. See the illustration below.

Slide5To continue with the example we’ve used in this series, let’s say you newly arrived in Germany, do not have a local bank account, and lost your wallet. You got online to Western Union’s website to send yourself $2,000 USD from your Bank of America account for pick up at a local Western Union agent. Western Union will charge you a $5 USD transferring fee, plus 600 basis points above the wholesale exchange rate, payable at the time you schedule the transfer. The fee is in some way split among Western Union and the agents behind the scene. According to the website, the funds take 3 days to arrive.

Another option is to fund the transfer with your US debit card, if you have the information saved online. This allows you to receive cash at the local agent almost immediately, but you will pay a $45 fee! The same unfavorable exchange rate applies. However, if you have no other options or were in an emergency situation, you might be willing to do this.

Lastly, Western Union also will deposit the transfer fund from your US bank account into your local bank account in some countries for a fixed fee, just like PayPal and a bank’s wire transfer can do for you. For transferring to Germany, it only costs $2.99 USD for the funds to arrive in 5 days through Western Union, although the exchange rate may be less favorable than what PayPal or your bank offers, depending on the day of transaction.

Depending on which country you are in, Western Union can be a better option for your international fund transfer need than PayPal. Western Union only recently reduced its pricing for money transfers to compete with the new remittance service providers such as XOOM and TransferWise, which occupy smaller markets but are growing rapidly with innovative business models. I will cover those two providers next.

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