Immigrant Money Is a Gold Mine

Drenched by downpours, Guillermo de la Vina wandered the agricultural outposts of Oregon and Washington in a thin raincoat and polished shoes, courting immigrant owners of small markets and stores.

The businesses were rundown, planted in the mud of one-street towns. But De la Vina knew they could be gatekeepers for billions of dollars that Mexican migrant workers send home yearly. He wooed the would-be agents en espanol, winning them over with promises of respect for the hard-working and the poor.

In doing so, he became a soldier in an army of scrappy competitors who have loosened the iron grip that Western Union and MoneyGram have long held on the massive Mexican money transfer market. Armed with street savvy and cultural sensitivity, hundreds of entrepreneurs like De la Vina--many of them immigrants themselves--are feasting on the same immigrant market that fed years of staggering growth for the big corporate players.

The implications are huge. Competition has cut the price of wiring money by more than two-thirds in some cases. With an estimated $7 billion a year passing from Mexican migrants to family members back home, that means millions of dollars in savings for some of the poorest residents of both nations. For behemoths MoneyGram and Western Union, it has meant lost market share.

The changes come at a time of industry flux: More than half a dozen recent class-action lawsuits have blackened the eyes of the big players, alleging steep hidden fees for transactions to Mexico--long the industry’s fastest-growing and most lucrative market.

Mounting customer dissatisfaction with high fees and lousy exchange rates--not to mention bad publicity--have created an opening for rough-and-tumble operators.

“People have been . . . breaking into the monopolies,” said Manuel Orozco, a program director at the Washington-based Inter-American Dialogue who has studied the industry.

The first challenge to the giants came in the unlikely person of an Italian immigrant and onetime pizza chef. Paolo Orlandi began his American entrepreneurial life kneading dough at the Flying Pizza in Santa Barbara. He moved to Los Angeles in 1979 and found work in the downtown toy district. There, serving customers in a gritty ethnic portal, he laid the foundation of what would become a money transfer powerhouse.

Converting pesos to dollars for immigrant toy buyers, he got an earful about their frustrations over wiring money to Mexico via Western Union. Lousy exchange rates and hidden fees made for shriveled remittances for relatives in rural areas.

Orlandi was convinced he could beat Western Union at its game.

This was a powerful foe. Founded as a telegraph company, Western Union had offered money transfer service to Mexico since the late 19th century. Key to its expanding network were thousands of small U.S.-based markets, travel agencies, carnicerias and other ethnic stores that serve as agents. South of the border, the company had long-standing agreements with Mexican telegraph offices and banks to distribute money.

Orlandi Valuta Alters Industry Landscape

The cost of service was high, and rising. With no real competition, the company boosted fees by 5% to 8% a year, according to the Federal Trade Commission.

Orlandi surveyed the landscape and saw gold. After a stint as an agent of a small telegraph company, he launched Orlandi Valuta in 1985. He dramatically underpriced Western Union. He challenged MoneyGram Payment Systems Inc. when it entered the fray in 1989 as a subsidiary of mighty American Express. And he swatted at smaller players who fought over territories as tiny as a city block.

In a world shadowed by allegations of money laundering and claims of shady agents absconding with customers’ money, Orlandi quickly learned to play hardball.

Western Union and MoneyGram filed lawsuits accusing him of bribing their agents to win them over to his side. There was the phone call he placed to a Santa Ana MoneyGram agent, promising $40,000 if she carried his service, and the visit to a Salinas music store with a suitcase he said held $90,000 in cash, the lawsuits allege. The money, Orlandi promised, was Western Union agent Jose Escoto’s to keep if he added Orlandi’s service, Escoto said in a declaration.

Orlandi counter-sued, denying the allegations and accusing the big companies of the same behavior. The suits were settled out of court. He also filed similar suits against smaller competitors.

By 1996, Orlandi Valuta had 3,000 agents in four states.

Though aggressive tactics and lower prices helped fuel his success, former colleagues credit Orlandi’s grass-roots touch for luring customers from the big players.

Orlandi’s predominantly Mexican-born staff understood immigrant concerns. His employees passed out piggy banks, pens and key chains at agent locations while many of Western Union’s agent representatives couldn’t even speak Spanish.

“It was disastrous [for Western Union],” said De la Vina, one of many former Orlandi executives who later fanned out to form their own enterprises. “That was the opportunity [Orlandi saw], and I think there’s still opportunity.”

Still, choice remained slim: Western Union and MoneyGram controlled 97% of the international market in 1996 (with MoneyGram a distant second at 16%), according to a Coopers & Lybrand study conducted for the federal government. And fees for Mexico remained steep into the late 1990s--as much as $32 to wire $300.

Soaring Mexican immigration fed 20% annual industry growth. The Mexican economic crisis of 1994 fattened profit margins on the exchange rate as the peso plunged.

In 1996, MoneyGram’s then-parent, First Data Corp., acquired rival Western Union. It ditched the weaker MoneyGram--a condition the FTC imposed to head off a monopoly--keeping key executives who had helped that company grow.

The following year, it swallowed Orlandi’s hard-won empire.

Exhausted by his battles, Orlandi sold out to his nemesis just months after litigation with the company settled. He walked away with $66.5 million, Securities and Exchange Commission documents show, and left the company as part of the deal. He spends much of his time on his yacht in the Mediterranean and could not be reached.

The acquisition got Orlandi off Western Union’s back and boosted First Data’s Mexico business. But the Italian had permanently altered the industry landscape, paving the way for competitors.

Newly aware of the market’s potential, they proliferated. The number of money transmitters licensed in Texas, for example, has more than doubled since 1997, focusing mainly on Mexico. In California--where licensing requirements are strictest--the number has increased by 33%. To be licensed, companies must meet certain financial standards, to ensure they don’t go under and leave customers hanging.

Institutional players have entered the mix: The U.S. Post Office launched a wire transfer service to Mexico four years ago that it plans to quadruple in size next year. Mexican banks have spun off operations in the U.S. Credit unions recently launched a low-cost wire transfer program to Mexico in an effort to attract Latino immigrant members.

And a La Mirada-based courier service that delivers money orders as an alternative to wire transfer has seen its business soar. Mexico Express, which offers 24-hour delivery of up to $1,000 in money orders for $15, has sent more than 4.5 million letters to Mexico this year, up from 200,000 in 1994.

Its employees have more than doubled to nearly 800 in the last two years alone, and its agents have quadrupled to 1,600 in 26 states, said Chief Executive Guillermo Reynoso.

Other players, such as De la Vina’s Sigue Corp., have flocked to states with looser or no licensing laws and growing Mexican immigrant communities--Alaska, Montana, Wyoming and Minnesota among them. Sigue awaits a California license. A criminal record De la Vina earned nearly two decades ago for possessing stolen property has probably drawn out the process. The conviction has been expunged, but he was still required to report it to regulators. (Sigue attorney Manuel Diaz described the record as “unrelated to current events.”)

Nevertheless, four years after De la Vina traveled north in search of a niche, his company employs nearly 300 at its San Fernando headquarters and transmits money from two dozen states.

For the big companies, the new vitality couldn’t have come at a worse time. Consumer activists took aim at the industry and, beginning in 1997, class-action lawsuits rolled in from California, Texas and Illinois. The suits allege that the foreign exchange spread--the difference in the rate at which the companies buy and sell pesos--is a hidden commission withheld from consumers in advertisements and on transaction receipts.

Though some litigation is pending, a proposed settlement to most of the cases is expected to receive final approval soon from a federal judge in Illinois. Under the deal, the companies will issue discount coupons to consumers who wired money to Mexico since 1987. They will also disclose the existence of the foreign exchange spread and donate $4.6 million to Latino community causes.

Still, the litigation was a public relations nightmare, shining a light on pricing practices. Latino politicians chimed in, blasting the practices as “reprehensible” and pushing for permanent reforms.

Firms Benefit From Grass-Roots Marketing

Meanwhile, the new companies--most of which also profit on the exchange spread--have flourished below the political radar. They have benefited from cheaper technology and close ties to Mexican financial institutions. They have slashed prices. And most of all, they have relied on grass-roots knowledge of Mexican consumers and word-of-mouth marketing.

Reynoso, of Mexico Express, has sent promoters into the fields of the Central Valley to promote his courier service to farm workers. New York-based Vigo Remittance Corp. offers the option to send in dollars.

Founder Helio Gusmao, who once avoided the Mexican market because of the big players, forged ahead in 1998. Mexico now represents 45% of Vigo’s business to 47 countries.

Other companies, such as San Diego-based Giromex, play up their roots, offering personalized treatment “entre mexicanos.”

“The big companies set up all the infrastructure, but they lost the sense of the people,” said Jaime Schabes, executive vice president of Los Angeles-based FinMex, which opened in 1998 and now transmits money from seven states. “That’s when the small players like us came in.”

The competition has taken a toll.

Although MoneyGram’s market studies once identified U.S.-Mexico transfers as the ticket to “substantial future growth,” recent SEC filings by its parent, Viad Corp., report “continued weakness in the U.S.-Mexico corridor.”

The last quarter’s revenues for Viad’s payment services subsidiaries--MoneyGram included--were up 14% from the same period last year, at $173.5 million. But the growth has come largely from gains elsewhere, and the company reports growth in transaction volume only after subtracting Mexico from the equation.

“More niche players in the industry are entering the Mexico market and taking market share, much like we took market share from Western Union,” said Viad spokesman Brad Parker. He pegged MoneyGram’s current share of the Mexico market at 12%.

That’s a sharp decline from the 32% share MoneyGram was said to hold just four years ago, according to published comments by former General Manager Doug McNary, who jumped to Western Union to head its North American operations. He estimated Western Union’s share of the Mexico market at 55% in 1996, a number that many industry watchers believe has dropped recently.

First Data’s money transfer business--which includes Western Union and Orlandi Valuta--generated $482 million in revenues in the last quarter, up 17% from the same period last year. The company vastly outnumbers competitors with outlets here and in Mexico. But its revenue growth also appears to be coming from other sectors.

According to First Data’s SEC filings, competition has compelled the company to drop Mexico prices, narrowing profit margins. And while revenue from international money transfers increased 52% in 1999--much of it from a push into Germany--the North American business--which includes Mexico--grew by only 5%.

“It’s fair to say the rate of growth has slowed,” said First Data spokesman Pete Ziverts, who declined to give figures for Mexico, “and a lot of that can be attributed to increased competition.”

For consumers, the change is clear enough. There are choices. And that means better deals.

In downtown Los Angeles, 20 money transfer outlets fight for business on a six-block stretch of Broadway alone. On a recent Saturday, FinMex posted its exchange rate boldly on a sidewalk sandwich board, while Western Union and MoneyGram disclosed their less-favorable rates only if asked.

Vigo offered a $1,000 transaction for $8--less than a fourth of Western Union’s rate for the same amount--with an option to send in dollars. And Texas-based DolEx Dollar Express Inc. drew traffic with a promotion at half Vigo’s price.

“There are places that are more expensive and places that are cheaper,” garment worker Rafael Hernandez said with a grin after sending money to his mother in Puebla from DolEx.

The fees of both companies have dropped slightly in the last few years--Western Union offers a $300 transaction for $12 and MoneyGram for $10--although both companies’ exchange rates are still less favorable than those of most new competitors.

But the cheaper options have clearly worn away at the giants.

Marcelo Valdenebro, a manager at a MoneyGram outlet on Broadway, could only lament the change.

“There’s a lot of competition and our prices are higher,” he said.