Entering a New Market: Building Versus Buying
Victoria’s Custom House provided a key component for Western Union to enter a new market.
When a big business decides to enter a new market, a question inevitably pops up: Should it build a new operation, or buy an existing one and convert it to a division of the parent company?
The Problem
In 2008 the storied telegraph company, Western Union, based in Colorado, was at the top of its game. It had built a multi-billion-dollar business ($5.2 billion in revenue in 2010) by providing money-transfer services, largely to consumers and some small and medium-sized businesses in small towns throughout the U.S. But it couldn’t supply services demanded by increasingly global businesses. To access the $24-billion international B2B market, it had to create a system that could lead the company to being an international payments company.
The Solution
Western Union was big in America’s small towns, but had little presence internationally. When it came to international payments, most small businesses were forced to use the traditional banking system. Western Union saw an opportunity for a payment processor that could set up a dominant global system.
When Western Union decided to move into this market, it faced the classic buy-or-build decision: Should it build its own business in the Western Union style, or should it simply buy an existing business with international B2B money transfer services?
Both options had problems. Building would involve creating a division that was foreign to a company culture that was based on consumer money transfers. Buying was difficult because no existing companies did exactly what Western Union wanted.
However, in Victoria, B.C., Custom House Currency Exchange was familiar with the territory. It had grown an international foreign-exchange business by providing fast and cost-effective money transfer services throughout the world. While it wasn’t exactly what Western Union was looking for, it could provide a base from which to create a powerful international B2B payments platform.
In 2009, Western Union paid US$370 million for Custom House, which instantly gave it access to a growing international payments system that included a foreign exchange component. From Custom House, it created a Business Solutions division, adding to it with the subsequent acquisitions of some smaller European payments companies, and the payments system unit from a British company called Travelex.
Today, the Victoria operation has been turned into Western Union’s product management and technology centre, which employs about 100 people in Vancouver and Victoria. The centre focuses on product innovation, something Custom House excelled at when it was bought.
With the Travelex Unit’s B2B payments system added to the former Customs House platform, Western Union is poised to dominate the international small business B2B payments market. It now operates in 18 countries and claims to be the world’s leading non-bank provider of cross-border business payments. In 2012, it plans to continue expanding globally.
Lessons
• Know what you do well.
Western Union’s expertise was in money transfer, so it was an obvious step to do that for businesses internationally.
• Building isn’t always the right option.
Buying a company can ramp up a new service much faster.
• Assemble the right parts.
After it acquired Custom House as a base, Western Union added other components that helped it build a dominant cross-border business payments system.
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