In large systems integration projects, it is customary for the buyer to award the entire contract to a systems integrator who manages all other companies required to fulfill the different pieces of the project. In such an engagement model, the buyer has “one throat to choke”, and companies who could normally be rivals land up in bed together as partners for the specific project. The following example illustrates this model.
When a Top-5 bank wanted to launch the latest Faster Payments product in the United Kingdom, it spotted a couple of state-of-the-art products that could deliver the new messaging formats, high volume handling ability and many of the core needs of the Faster Payments Service. To make the necessary modifications and enhancements to these standard products to fit its specific requirements and to ensure that they landed safely into its existing system landscape, the bank appointed a systems integrator. The bank also realized that its old and creaking payments infrastructure had to undergo modernization in lockstep with the introduction of new products in order to deliver a complex and high volume, realtime payments system like FPS. Its total IT outsourcing partner was the natural choice to modify its legacy systems, integrate and test the end to end solution and fulfill other program management functions. This led to the formation of a consortium comprising of five companies: Company A did program management, Company B was the systems integrator, Companies C, D and E were chosen as suppliers of the new products. It was no secret that many of these companies were competitors to one another in the general market. To ensure that their competitive instincts did not adversely impact the success of the project, the bank put in place a comprehensive governance framework that fostered a professional and harmonious project atmosphere by clearly specifying their individual roles and responsibilities within the context of the specific project.
Now, all this is fine in case of large projects where no single company has total control over the required technology components. However, when you come across an industry leader like Western Union inviting banks into the remittance processing market which is its traditional stronghold, you have to sit up and take notice and wonder what could be the motivation for consorting with the enemies as it were. In a recent GTN News interview, Western Union’s Dr. Wolfgang Fenkart-Fröschl is openly encouraging banks to enter the remittance business even though it’s well known that Western Union’s charges are higher than those of Citi, Wells Fargo, Bank of America and ICICI who are among a handful of banks who have been fairly active in the remittance business in past year or so.
For the uninitiated, Western Union, a Denver, Colorado based company is the largest remittance service provider in the world commanding close to 80% of the market for transferring around 430 billion dollars in 2008 from migrants working in USA, UK, Germany, Middle East and other countries to their families back home in India, China, the Philippines and Latin America, to name a few leading receiving nations.
Western Union has traditionally concentrated on the so-called Cash-to-Cash model in which remitters hand over cash at the sending country and beneficiaries collect cash at the receiving country. Other models include Account-to-Cash in which senders fund their transfers from their checking accounts and receivers collect cash at the destination; and Account-to-Account where no cash changes hands on either sender or receiver’s leg of the remittance transaction. Since Western Union is not a bank, it cannot offer checking accounts, which means it cannot drive the account-based remittance models by itself.
Ever since remittances began, cash-to-cash has been the dominant remittance model (enjoying greater than 80% share of volumes) and Western Union has been its king. Now, on the surface, Western Union’s latest overture to banks encouraging them to enter the remittance market could be seen as an attempt to acquire an additional revenue stream if it can persuade banks to use its proven platform on a whitelabeled basis (instead of banks developing their own systems). But, in a typical whitelabeling model, different players only share technology, not customers. Western Union’s pitch suggesting that banks can access its customer base seems to fly in the face of conventional business wisdom. It makes sense only if it expects a massive defection of its existing cash-using customer base to account-based models which are out of bounds for Western Union by virtue of its charter of being a money transfer operator.