Could Citi Make Money by Sending Money?

Transferring funds is lucrative, but the market is tight

When Citigroup (C ) bought Mexico's Banamex bank in May, the New York financial conglomerate said it would use the purchase to market to Hispanics in the U.S. Citigroup hasn't said how it will do so, but analysts say it needs to roll up its sleeves and get to work in the highly profitable and fast-growing money-transfer business. Already, Banamex branches are pickup points for a large slice of the funds transferred to Mexico by immigrants.

But the big bucks are in the transfer business itself. It's dominated by just two players: Western Union Financial Services Inc. and MoneyGram Payment Systems Inc., who claim almost 90% of the $41 billion a year in money transfer business. The two units earned nearly 30% profit margins for parent companies First Data Corp. (FDC ) and Viad Corp (VVI ) in 2000, although pressure from local government, class action litigation, and competition from mom-and-pop shops has driven down fees to Mexico since December.

Fueling the profits are hefty fees paid by some of the country's lowest-paid workers. The vast majority are immigrants who send money back home to families they've left behind. And it costs them dearly. Using Western Union to send $500 from the U.S. to Haiti, for example, costs $43--more than a day's pay at minimum wage. Most customers, though, have no alternative. Few have bank accounts. And banks don't offer to transfer money in 15 minutes or less, as MoneyGram and Western Union promise, or accept transactions from people who can't prove that they're legal immigrants.

It's not easy to break into the business, as Citigroup well knows. Back in 1986, Citicorp invested $10 million to launch its own stand-alone money-transfer business. The game plan was simple: The bank would undercut the competition by 20%. By March of 1998, Citicorp had scrapped the plan because Western Union had snared exclusive contracts with most of the huge network of independent outlets that collect and pay out the money it transfers. Now, Western Union controls three-quarters of the worldwide market, according to Spencer Nilson, founder of HSN Consultants in Oxnard, Calif. Hard to believe, but the industry was once even more concentrated. Western Union's parent, First Data Corp., bought MoneyGram from American Express Co. in 1995, but was forced by antitrust regulators to divest the business .

Already, the two leading players are so far ahead that any competitor will have to invest big to catch up. Western Union has 101,000 agents worldwide, MoneyGram 37,000. In the U.S., the two have signed up everyone from check-cashers to grocery stores to Kmarts and 7-Elevens. Outside the country, local law often requires them to have a relationship with a bank.

U.S. banks have been scrambling to set up online person-to-person payment systems, like Citigroup's c2it or independent PayPal, that could someday replace traditional money transfer. They boast 5% fees and "send anytime" convenience. But unlike traditional money-transfer operators, they take days, not minutes, to send cash. They often require both participants to have a bank account, debit card, or credit card, and they're only accessible online.

KEY STRATEGY. Citigroup clearly needs to scrutinize the competition before taking a second stab. MoneyGram's busiest office is in New York's predominantly Dominican Washington Heights district. One recent Sunday, the temperature was 92F in the shade, but on the corner of 181st Street and Juan Pablo Duarte Blvd., a MoneyGram rep coolly handed out glossy pamphlets adorned with the American flag and the title Immigración: Preguntas Y Respuestas (Immigration: Questions and Answers). The spacious store sells everything from money transfers to rental cars, phone cards, and plane tickets, in Spanish

Ironically, the "everything under one roof" strategy that U.S. banks, especially Citigroup, have struggled to sell to customers has been alive and well in Spanish-speaking areas such as Washington Heights for a decade. Customers can take care of finances, insurance, legal advice, and travel at the same store. They just pay more for it.

By Heather Timmons in New York

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