MoneyGram is Now the Most Sophisticated Money Transfer Company

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  • MoneyGram is the first company to utilize both Visa Direct and blockchain technology.
  • The company will expand the use of blockchain globally after its Q3 success in Mexico, greatly increasing its operating margin in the next quarter (Q4).
  • On the most recent quarterly financials, SG&A cost dropped by 3% from 40% in Q1 of 2019 to 37% in Q3 of 2019 mainly due to its 2018 restructuring.

I first noticed MoneyGram International (MGI) when the company partnered with Ripple Labs in June of this year. This event sparked my initial interest in the company. The stock price jumped from $1.43 to $3.88 (288%) right after the company announced its partnership with Ripple. After the news, MGI shares have done well this year, reaching a high of $6.70 in September.

Source: YCharts

 

MoneyGram, under its original name “Travelers Express”, has been around since 1940. The company officially changed its name to MoneyGram in 1998 when Travelers Express purchased 100% of a Denver-based company, formed in 1988, called MoneyGram Payment Systems Inc. (“MPSI”).

MGI stock price peaked in 2006 and dropped significantly afterward. When the global recession hit in December 2007, MGI’s stock price plunged by 98% from its all-time high of $296 per share to $6.4 per share. In 2008, Thomas H. Lee Partners, a private equity firm, and Goldman Sachs saw an opportunity and recapitalized the company for 79% ownership in the business.

The company’s share price never fully recovered even after the recapitalization, leading to the pending sale of MGI by Thomas H. Lee Partners to Ant Financial, a Chinese financial service company, in 2018. However, the Committee on Foreign Investment in the United States (“CFIUS”) rejected the proposal over data safety concerns.

MGI’s stock price continued to decline after this rejection to an all-time low of $1.43 per share until its partnership with Ripple Labs in 2019. The agreement gives Ripple Labs a 10% ownership in MGI and calls for the reasonable deployment of blockchain technology by MGI.

Why is MoneyGram struggling?

From an accounting perspective, MoneyGram is struggling because of low revenue and high costs. Revenue numbers have been declining for the last 5 years. Revenue declined by 9.6% from 2017 to 2018, and on average, 1.5% each year for the last 5 years.

In 2018, the Company generated 88% of revenue from money transfer services. The majority of customers are unbanked individuals, or immigrants sending money back to their home country. Per the World Bank:

“They [The World Bank] estimates that 1.7 billion adults are unbanked […] 2019 global remittances will approximate $715 billion, based on 2017 global data.”

The market for unbanked individuals is large. In 2018, MoneyGram failed to compete successfully against Western Union and PayPal for a share in the unbanked money transfer market.

MoneyGram Has a Low Operating Margin

MoneyGram does not operate efficiently. The company has high COGS and SG&A costs. On average, COGS and SG&A account for 49.7% and 43% of Revenue during the last 5 years, resulting in the average 5-year EBITDA of only 7.3%.

Because of high agent commission cost and banking fees, COGS is about half of the company revenue. The company paid $688 million in total during 2018 for agent commission and bank fees to facilitating money transfer services.

The company officially launched its “Digital Transformation” project in 2018 to offset the high operating costs. Through this restructuring program, MGI cut 400 of its 999 global employees, reducing SG&A costs. At the same time, the company eliminated unprofitable and high-risk locations.

Blockchain Will Cut Down COGS Costs by Q1 of 2020

MGI is the first publicly-traded company to use blockchain technology. On its 2019 Q3 earning release, Alexander Homes, its CEO, stated:

“We’re proud to lead the industry in innovation becoming the first money transfer company to launch Visa Direct and also the first to utilize blockchain capabilities at scale through our strategic partnership with Ripple.”

Visa Direct is a real-time payment solution. The technology allows customers to send payment through the MoneyGram app to eligible debit cards in the U.S in less than 30 mins. The move will likely increase revenue for MGI in the next quarter (Q4).

Brad Garlinghouse, CEO of Ripple Labs, commented on its relationship with MoneyGram in an interview with Yahoo finance. The CEO stated that the cost-reducing effect of blockchain on the exchange of U.S dollar to Mexico Peso and the U.S dollar to Philippine Pero will fully become apparent in Q1 of 2020.

The implementation of xRapid in Mexico in Q3 correlates with the change in XRP transaction volumes. xRapid exchanges occur instantaneously and do not change the price of XRP. We see below that the volume of XRP transactions greatly increased in July. In the future, we can potentially gauge the performance of MGI by tracking the change in XRP transaction volumes when prices remain relatively fixed.

Source: XRPcharts

 

We Still Have Not Seen the Cost Reducing Ability of Blockchain

We still have not seen the full effects of blockchain on MGI’s operating cost. In Q3 of 2019, MGI had an EBITDA of 10%, mostly due to a decrease in SG&A cost from its 2018 restructuring program. SG&A costs have been decreasing in 2019 from 40% in Q1 of 2019 to 37% in Q3 of 2019. We are likely to see the effect of blockchain on COGS costs in the next quarter (Q4) and Q1 of 2020 when the company launches xRapid beyond Mexico. The CEO of Ripple Labs stated in a Yahoo interview:

“He [Alex Holmes, CEO of MGI] is upset with us because we are not moving fast enough, that was unbelievable. He wants us to launch ODL, formerly knowns as xRapid on more markets, more quickly because they’re having such a good experience with Mexico.”

I expect lower SG&A costs in the next quarter (Q4) due to the effects of the “Digital Restructuring” program that was officially completed in Q2 of this year and a lower COGS because of the expansion of xRapid (ODL).

In Q3 2019, money transfer transactions outside of the U.S grew by 7% year-over-year. However, the company may still struggle to increase revenue in the next few quarters. The company’s emphasis on increasing its global presence will take some time since growth is will not be immediate. We are likely to see the full effect in 2020.

MGI is a Buy Right Now

Historically, MGI has been a terrible company to buy. The company failed to implement anything revolutionary until 2018. In 2018, the company finally launched its first mobile application and drafted its official plans for international expansion. Then, in 2019, the company launched Visa Direct and begin utilizing blockchain technology.

The global money transfer market is a $715 billion market. Traditional automated clearinghouse, checks, and SWIFT transactions are slow, taking 3–7 days to complete. Today, customers demand a fast and secure money transfer process. To ensure a faster transaction, money transfer companies must pre-fund customer accounts, which increases COGS significantly and freezes up funds. The application of blockchain solves the problem for both the company and its customer; a faster and more secure transaction in seconds at a fraction of the cost.

MGI is a company fighting for a comeback. The company has addressed its financial issues through implementing its “Digital Transformation” program in 2018 and the utilization of blockchain technology in 2019.

Today, MGI is the most sophisticated money transfer company. I believe the stock price has room to grow in the future. The company is a risky bet but one that is worthwhile.

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