In the past couple of weeks, all eyes in the payments world, especially the money transfer world, have been on the MoneyGram acquisition by Ant Financial. The news was announced in January 2017. To say that it took everyone else by surprise is an understatement. MoneyGram was performing poorly on its stock price, that much is true, but overall the company was doing OK. Although challenged on various fronts, the Goliath was managing.
Out of the blue, a Chinese payments company bid for it. The day after the initial announcement was made, those who opposed this deal were hell-bent on publishing everything negative about this possible merger. The spin doctors were set in motion.
Since then, the merger has seen a lot of negative press. Myopic US senators, congressmen and US payment companies are flagging the deal, citing national security concerns; that by having a Chinese company buy MoneyGram, the Chinese government would gain access to US citizens (especially military personnel who use MoneyGram) on a scale like never before. The suggested usage and patterns as deduced from this data could wreak havoc by giving the Chinese government an upper hand. More on this later.
As expected, someone from the money transfer industry had to jump at the opportunity of acquiring one of the largest and most respected names in the money transfer space. Face it – very few people know about Ria Financial. Despite being #3 (after Western Union and MoneyGram), Ria is huge, but has a branding issue (sorry Ria friend, its true!). Ria is owned by Euronet, so the offer from the third-largest player was a welcome respite for many who feared MG might go to China. As recent as a week ago, Ant Financial upped its offer to buy MG, valued at USD 1.3bn.
MoneyGram and Ant Financial merger scenario
Here are some thoughts, in no particular order:
- The CFIUS (The Committee on Foreign Investments in the US) has been presented with a lot of letters, emails and various face-to-face meetings (read photo ops) for all those who think the deal is a serious concern and will be detrimental to the national security of the United States.
As seemingly laughable as the above statement may be, let us examine some of the points that are considered toxic under the current arrangement. There is some merit to the security threat posed by the merger.
- With a company like MoneyGram, there is no secret technology involved that the CFIUS would be looking deeply into, unlike buying a semiconductor company or an internet infrastructure manufacturing company.
- Technology is not under scrutiny here. In fact, the technology is quite dated (even by upgraded standards), because that is how the money transfer industry just is. Very nascent, if one can say that.
- Access to historical data and possible exporting of this confidential (transaction) data outside the US is of strong concern.
- Access to KYC information on file with MoneyGram that could be used for correlation and/or profiling purpose by the Chinese government.
MoneyGram was fined in 2012 by the Department of Justice (DoJ), where its anti-money laundering programme was scrutinised. In order to avoid a conviction, MG agreed on a DPA (deferred prosecution agreement) with a USD 100m forfeiture for aiding and abetting wire fraud, and failure to meet regulatory obligation as imposed by the Banking Secrecy Act, as well as the various state regulators by which it’s governed. You can read the DoJ DPA here.
For anyone to assume that MG would be given a lax hand by the regulator (state or federal) is wrong. If nothing else, MG is under the scrutiny of the regulator after the DPA, and if the merger with Ant Financial happens, the scrutiny may increase. As a licensed money transmitter/money services business, MG has to guard consumer and transaction data. This is mandated by law.
- FinCEN will also pay a pivotal role in this merger possibility. It can be expected that FinCEN will participate in the approval process and possibly impose conditions so that access to data is controlled within federal and state guidelines. This will also mitigate the risk of leakage or unauthorised usage.
- Additionally, it’s well within the CFIUS purview to request additional measures that would require enhanced examinations. This would directly set a higher bar for an AML/compliance programme within the merged entity.
What people mostly fail to realise is that Ant Financial’s AliPay is already licensed in various US states as a money transmitter. See NMLS record, as below:
Does this mean the Chinese government already has access to US consumer/financial data? No. And to assume otherwise would be reckless speculation. Time and time again, state examiners audit money transfer companies to ensure that access to data is severely limited, and even then only to those parties through whom the transaction is being channelled. Non-party actors have zero access to data.
Even party actors have limited access. For example, don’t assume social security number and date of birth is freely shared with correspondents outside the US. It’s on a strictly need-to-know basis, most likely when an FMU outside the US files an AML, or a CTF-related flagged transaction needs to be further investigated.
There is truth that Ant Financial has some Chinese government investment (both National Social Security Fund – NSSF and China Investment Corporation are shareholders). It’s not clear how much the Chinese government owns, but the last I read, I think the number is closer to something like a 15% stake in Ant Financial.
CFIUS will weigh in on this very carefully, looking at the possible scenarios where and how this information can be compromised by Ant Financial for the benefit of the Chinese government. The US intelligence community will certainly be consulted and would give its formal opinion (technical and tactical in nature with respect to everything under the intelligence umbrella). It’s not that the money here is large (USD 1bn +/- another billion is pocket change for the US). What’s being analysed with deep scrutiny is how the financial data can be misused. Can there be a scenario where legally (or illegally) the new management can use the data to develop enhanced profiles on US personnel (government or not)?
Let us not forget the job creation aspect of this merger. The respective CEOs of MoneyGram and Ant Financial have cited that continued investments post-merger will mean more jobs for the US economy. Not to mention, no one seems to object to the fact that US dollars will be coming into the United States, and not flow out. That should be good, right?
MoneyGram and Euronet merger scenario
Here are some thoughts on what could transpire with Euronet successfully beating out Ant Financial to merge with MoneyGram.
- The most important point that would come out of the merger is the redundancy element. MoneyGram shops directly opposite (or side by side) where Ria Financial shops!
- Consolidation would have to occur. How many agent locations would be affected? One is going to assume 10,000s, easily.
- Expect a lot of people to be laid off or made redundant with the merger. This merger brings unemployment.
- Even if Euronet agrees that it will not change things, for how long will that be? At the end of the day, the bean counter is going to run things for Euronet, and let them know a parallel and equal MoneyGram and Ria Agent in the same location – cannot exist.
- When #2 and #3 merge, a Goliath is created. So clearly this is heading in the wrong direction – we’re going from a competitive market to a monopolistic market.
- WU currently enjoys an estimated market share of 33%, while about 11% and Ria 9%. Combining the two would create an oligopoly of two players controlling 33% and 20% respectively.
- Ria’s lower pricing when compared to MoneyGram for most corridors would be a point of concern! Almost every analyst agrees that consolidation would be a given, then what pricing model is followed? Ria’s, or MoneyGram’s? If the former, then MG loss has to be taken into effect – if the latter, the reverse is true. Ria’s loss has to be taken into consideration.
Barring the CFIUS issue, a MoneyGram plus Euronet merger just doesn’t make much financial sense in the long run. While Euronet has decent intentions, even they know that pulling it off will translate to making some tough choices and sacrifices.
MoneyGram and ‘X’ merger scenario
While everyone is focused on Ant Financial and Euronet as the only suitors, it would be prudent to keep an eye on the door, because another suitor may show up. What the bizarre love triangle has done is that it has brought time with it; the potential merger will not be approved immediately. This gives a third (or fourth) suitor to quickly assess the situation, raise capital and present a proposal to the MoneyGram board.
Who could possible be in contention for buying MoneyGram? I’ll tell you who it will certainly not be! It won’t be Western Union. Too many regulatory hurdles and anti-competitiveness issues to pass in order to make MG+WU merger a reality. Any of the top 25 money transfer companies. This includes online platforms such as TransferWise, and so on. They simply don’t have the cash to buy such a large incumbent. None of them can comfortably raise the amount of money that would be required to bump Ant Financial, weather through the stock sell-off that will happen, then continue to run a Goliath.
It’s hard to make an educated guess as to who it could be, but the two companies that come to mind are Microsoft and PayPal. (My co-host from Around the Coin, Brian Roemmele, said Amazon.) PayPal is the digital equivalent of AliPay, Ant Financial’s core product, so it’s not too far-fetched to see PayPal acquiring MoneyGram. PayPal has all the necessary money transmitter licences. They know the game. PayPal is present in various international territories and would make one hell of a cherry to pick.
Don’t forget PayPal recently bought Xoom. (Yes, it does own a money transfer company, but one that is online only.) PayPal also bought TIO Networks recently. Being able to add a mature (read ‘seasoned’) network that’s nearly worldwide in coverage, would be a huge asset to PayPal as well as give it inroads to a very large swath of walk-in (mostly unbanked) customers. (What do you think Ant Financial will be doing with AliPay once it buys MoneyGram? Promote it, of course.)
The other wildcard suitor I see is Microsoft. Microsoft has clearly missed the mobile gold rush, and as far as payments are concerned, it hasn’t done much. Two years back, I broke the story of Microsoft entering into the world of payments, following up with its money transmitter licences filing and the award of a new one.
Even with the acquisition of Skype, Microsoft hasn’t done much. It was assumed (by myself and others) that Skype would be a game changer for Microsoft, and for payments (everyone using Skype would be able to exchange payments or credits). Sadly, that never transpired. Microsoft’s most recent purchase under CEO Nadella was the acquisition of LinkedIn. Surprisingly enough, Microsoft hasn’t screwed this up. Things are looking good for LinkedIn.
With the acquisition of MoneyGram – and to think, it would have to pay $1-2bn for it – is literally peanuts for Microsoft. With MoneyGram’s footprint, it could build a whole new set of services, previously unknown to Microsoft (the unbanked world for money transfer) and gain a mainstay footing in the game, in which it is currently only a spectator.
For both companies, the price is small considering the recent acquisitions they’ve had. I would almost like to say Facebook could be a competitor, but I have no intelligence and/or knowledge of this happening.
As Ant Financial is owned by Jack Ma, who also owns AliBaba, it may be worth your while to quickly understand what AliBaba Group is all about. (AliBaba Group at a Glance, November 2016).
READ NEXT: Interview with Peter Ohser of MoneyGram
– This article is reproduced with kind permission. Some minor changes have been made to reflect BankNXT style considerations. Read more here. Photo by Cineberg, Shutterstock.com