What is the difference between sending money via Western Union and services like Xoom?

Okay, lets break down the steps and the players involved in the money transfer business from the graphic below:



From the diagram, and starting on the US side in Chicago.

1 = "Joe" (The Remitter, the person Sending the money).

2 = The Western Union (or any other Money Service Bureau) Outlet in Chicago from where Joe will be sending the money.

3 = Bank "X" (in Chicago). Will explain the role of the bank later on.

Cross the oceans and we come to the Philippines side of things:

4 = Bank "Y" (in Manila). Will explain the role of the bank later on.

5 = Western Union outlet from where the money will be released to Joe's Mom!

6 = Joe's Mom!

7 = The Computer System on the Backend

8 = Accessing the computer system from Manila

9 = Access the computer system from Chicago

10 = Money Transfer Control Number.

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Some pertinent background information.

Each money transfer agent (or Western Union) agent, needs to work with his/her own money. So in order to be a Western Union agent, WU will require that you have money to work with. Lets put this condition to be US$ 5,000. So everyday, the Western Union agent needs to have US$ 5,000 cash at his/her location.

• So Joe walks-in at the Chicago location of a WU agent.
• He fills a form out that has essentially three components
• Component 1: His personal information (Remitter Information)
• Component 2: Information about the person sending money to (i.e. his Mom's name, address, telephone number, maybe some ID # of the Passwort or Driving License, etc). This is the Beneficiary information.
• Component 3: The amount of money being sent.
• WU AGent in Chicago will take all this and the money from Joe and inform him he needs to pay $10 more (as fees). So Joe would end up paying US$ 510.00 in total for transferring US$ 500 to his mom.
• The WU agent in Chicago then types all this information into the Computer (#7 in the Diagram) via #9 (typically they use the Internet to connect to WU's back-end system for agents.
• The WU system will give back to the agent, an MTCN (Money Transfer Control Number). This unique MTCN is a number that is unique and used only once. The number is tied into the transaction detail of Joe's transfer for that day for a particular amount for a particular beneficiary.
• Joe is given a receipt and walks-away!
• Joe 'texts' his mom only one thing: The MTCN number.
• Joe's Mom walks into the WU Agent in Manila (#5) and gives the MTCN Number.
• The WU Agent in Manila taps into the WU Computer System (#7) via #8 (usually the Internet).
• The system provides the WU Agent in Manila, with Joe's mom's full name and address, and the amount.
• Joe's mom presents her driver's license and the WU Agent (Manila) verifies all is correct.
• The WU Agent then taps into "his" US$ 5,000 that he is supposed to have at the start of each day, counts US$ 500 and hands it over to Joe's mom.
• Depending on the system (company used). The WU Agent in Manila could deduct US$ 10 as fees, leaving Joe's Mom with US$ 490.00 (Like I said this depends which company you use).
• Lets assume 1 US$ = 100 Units of Philippines Currency. So for $500 that Joe sent, Joe's mom should get 500 x 100 = 50,000 Philippines Currency Units (as per the Official Rate). Now Western Union could pay her lower. They can set the official transaction rate to be 1US$ = 97 Units of Philippines Currency. So Joe's mom, upon conversion would get = US$ 500 x 97 = 48,500 Philippines Currency Units, and the difference of 1,500 is kept by Western Union.
• The reason for this difference can be many, currency fluctuations, etc. but the reality is this is how they make money. The difference between the official price and the cash-out price is the income for Western Union.

So that was relatively simple on how the money gets transferred from Point A, to Point B. But the actual money Joe sent is still with WU Agent in Chicago and WU Agent in Manila is short US$ 500, so how does this get's settled?

Each Agent (on both locations) is suppose to have two things:

1. Cash at hand (US$ 5,000)
2. Deposit Balance with Western Union (US$ 5,000).

Total investment = US$ 10,000


So:

WU Agent has US$ 5,000 (Opening Balance) + US$ 500 (from Joe) + US$ 10 (Fees that Joe paid). At the end of the day, the Chicago WU Agent has:

US$ 5,510.00

Out of this he will deposit to Western Union: US$ 502 (US$ 500 for Joe and US$ 2 for Western Union's Fees).

Western Union earns US$ 2 from this transaction in Chicago from Joe.
WU Agent (Chicago) earns US$ 8 from this transaction from Joe.

On the flip side (flip side is usually used for counter opinion, you can change it to Other side of the coin/world), the WU Agent in Manila has:

US$ 5,000 (Opening Balance) - US$ 490 (paid to Joe's Mom). [US$ 10 was deducted as fees].

End of Day balance = US$ 4,510, out of the US$ 10 deducted from Joe's Mom's money, US$ 2 needs to go to WU for Fees.

So: US$ 4,510 - US$ 2 = US$ 4,508 Is the End of Day Balance for the WU Agent in Manila.

The Next day two things will happen.

The WU Agent in Manila will get a credit to his account for US$ 500
and his Account will be deducted for US$ 2 for the Fees.

Thus:

US$ 4,508 + U$ 500 = US$ 5,008.

Income earned: US$ 8.

Western Union itself nets off all the agents accounts in a given country, and then nets off all the countries on a daily basis.

Businesses that become the front-end agents, have to pre-fund themselves (as WU does not provide money to them).

The difference in how XOOM may settle versus how MoneyGram or Western Union may settle is based on the following variables (in no particular order)

• Who funds the agents (or do they pre-fund themselves).
• How often do we settle with the Agents (net-off), daily? hourly? weekly? etc.
• What are some of the electronic settlement options we have to clear funds. Can we inject money via our agents directly into the beneficiary's bank account (think interbank funds transfer), Can we provide the money via a debit card? Can we preload it to some existing card? etc.
• How is the flow of funds going to happen between the two different geographies?
• How much money do we intend to make on the exchange rate
• How much money do we make on the float (holding the money overnight and making money on it).
• Are their any loading and off-loading fees.

These are the questions and parameters that essentially differentiate each money service company from each other.