A surge in cross-border payments brings MoneyGram back into profitability

The general game plan for the past few years for money-transfer businesses has been to transform from a traditional walk-in-storefront model to an online and mobile-driven operation.

MoneyGram showcased the benefits of that strategy Friday while reporting a profitable third quarter and providing details on how it is positioning itself in a highly competitive marketplace and what is shaping a revaluation of its worth.

Dallas-based MoneyGram reported net income of $10.9 million, which signaled a return for the company to a positive net income and an increase of $18.6 million over the third quarter of 2019, in which the company had a net loss of $7.7 million during a restructuring period.

The positive third-quarter numbers also put a tough second quarter, with a coronavirus shutdown-induced loss of more than $4 million, in the rear-view mirror. Operating income was at $36.6 million, an increase of 123% year-over-year.

The company's income was fueled by a significant increase in digital cross-border transactions through MoneyGram online, at 176% over the third quarter of 2019, delivering 174% growth in digital revenue.

Total revenue was $323 million, a slight increase year-over-year, and money transfer revenue driven by digital growth was $297 million, up 5% over the previous year.

MoneyGram's digital offerings are attracting different types of consumers into the company fold, CEO Alex Holmes said during the third-quarter earnings call.

"It's a number of different things: It is consumers who have used traditional methods for a number of years and are looking for new alternatives, and people who have turned to digital the last couple of years in looking for efficient, cheaper ways to spend," Holmes said.

In the past quarter, people stranded by COVID-19 lockdowns turned to MoneyGram as an alternative to bringing cash to friends and family in person, Holmes noted.

"We are seeing new customers come into the mix through that, and the benefits of that are great to see because, longer term, those customers tend to be stickier for us," Holmes added.

MoneyGram has become more digital over the past few years. The company says it now has a digital presence in 81 of the 200 countries it serves.

Overall, online direct-to-consumer technology delivered 111% year-over-year transaction growth and 114% revenue growth driven by the MoneyGram app, high customer retention rates and increased productivity rates, the company reported.

MoneyGram's improvement parallels that of Western Union, which this week also reported a surge in revenue from digital transactions.

Talk earlier this year of a possible merger between Western Union and MoneyGram as a way to survive the coronavirus pandemic has gone quiet for now, as neither company's executives touched on the topic specifically this week nor were they asked about it by analysts or investors during their earnings calls.

However, with positive trends and a solid third-quarter report, MoneyGram's executive vice president and chief financial officer Larry Angelilli did address the potential for future mergers or acquisitions.

"This quarter really made a marked improvement in our cushion under all of our financial covenants and we are actually very comfortable against these covenants," Angelilli said. "So it is pointing to the ability to have a more appropriately priced and structured credit agreement."

MoneyGram's expectations would be to put together a couple more profitable quarters and get closer to the end of its digital transformation and other financial commitments to better re-evaluate its capital structure, Angelilli added.

"Everything is pointing in the right direction, but I don't think [a merger] is something we would do this year," he said.

Any future merger or acquisition would take into account a MoneyGram customer base. The company is not disclosing its number of customers at this time, saying only it is in the "tens of millions" and becoming increasingly loyal through the ease of use and pricing of MoneyGram Online (MGO) offerings.

"We are not quite at the point of sharing actual numbers, because we look at customers in a variety of ways, from MGO or walk-in, and customers who come from digital partnerships," CEO Holmes said. "We have a view of those customers across a variety of different cuts, on a 12-month or 3-month or current-month active basis."

The company is learning a lot about customer data and analytics, particularly during the coronavirus pandemic, and continues to monitor a customer base that continues to grow quickly, Holmes added.

The market for money transfer companies has become highly driven by competitive pricing.

"Transparency of price is really critical for this customer base," said Kamila Chytil, chief operating officer at MoneyGram. "We have been experimenting and trying different things in this channel for about 15 months now, and customers now trust us that we will give the absolute best possible price with the best experience, and that is why our retention rates are at 80%."

Customers are "fully able to comparison shop" and are doing so, Chytil added.

"But they are still choosing MoneyGram over competitors and some other fintechs," she said. "We are really confident in the formula we have developed, and it is really paying off in the major narrowing of revenue and transaction growth."

MoneyGram indicated it continued to benefit from its relationship with Ripple, a partnership designed to boost foreign exchange settlement for international payments, as well as with Visa Direct to allow customers to use payment cards and a three-year renewal of its contract with Walmart.