Western Union 2015 Annual Report Download - page 116

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Risk Management
Our Company has a credit risk management department that evaluates and monitors our credit and fraud risks. We are exposed
to credit risk related to receivable balances from agents in the money transfer, walk-in bill payment and money order settlement
process. We also are exposed to credit risk directly from consumer transactions particularly through our electronic channels, which
include our westernunion.com, account based money transfer and mobile money transfer services, where transactions are originated
through means other than cash, and therefore are subject to "chargebacks," insufficient funds, or other collection impediments,
such as fraud, which are anticipated to increase as electronic channels become a greater proportion of our money transfer business.
Our credit risk management team monitors fraud risks jointly with our information security and global compliance departments,
performs credit reviews before each agent signing, and conducts periodic analyses of agents and certain other parties we transact
with directly.
We are exposed to credit risk in our Business Solutions business relating to: (a) derivatives written by us to our customers
and (b) the extension of trade credit when transactions are paid to recipients prior to our receiving cleared funds from the sending
customers. For the derivatives, the duration of these contracts at inception is generally less than one year. The credit risk associated
with our derivative contracts increases when foreign currency exchange rates move against our customers, possibly impacting
their ability to honor their obligations to deliver currency to us or to maintain appropriate collateral with us. For those receivables
where we have offered trade credit, collection ordinarily occurs within a few days. To mitigate risk associated with potential
customer defaults, we perform credit reviews on an ongoing basis, and, for our derivatives, we may require certain customers to
post or increase collateral.
To manage our exposures to credit risk with respect to investment securities, money market fund investments, derivatives
and other credit risk exposures resulting from our relationships with banks and financial institutions, we regularly review investment
concentrations, trading levels, credit spreads and credit ratings, and we attempt to diversify our investments among global financial
institutions.
A key component of the Western Union business model is our ability to manage financial risk associated with conducting
transactions worldwide. We settle with the majority of our agents in United States dollars or euros. However, in certain
circumstances, we settle in other currencies. We typically require the agent to obtain local currency to pay recipients; thus, we
generally are not reliant on international currency markets to obtain and pay illiquid currencies. The foreign currency exposure
that does exist is limited by the fact that the majority of money transfer transactions are paid by the next day after they are initiated
and agent settlements occur within a few days in most instances. We also utilize foreign currency exchange contracts, primarily
forward contracts, to mitigate the risks associated with currency fluctuations and to provide predictability of future cash flows.
We have additional foreign exchange risk and associated foreign exchange risk management due to the nature of our Business
Solutions business. The majority of this business' revenue is from exchanges of currency at spot rates, which enable customers to
make cross-currency payments. Business Solutions aggregates its foreign exchange exposures arising from customer contracts,
including the derivative contracts described above, and hedges the resulting net currency risks by entering into offsetting contracts
with established financial institution counterparties.
Our financial results may fluctuate due to changes in interest rates. We review our overall exposure to floating and fixed rates
by evaluating our net asset or liability position in each, also considering the duration of the individual positions. We manage this
mix of fixed versus floating exposure in an attempt to minimize risk, reduce costs and improve returns. Our exposure to interest
rates can be modified by changing the mix of our interest-bearing assets as well as adjusting the mix of fixed versus floating rate
debt. The latter is accomplished primarily through the use of interest rate swaps and the decision regarding terms of any new debt
issuances (i.e., fixed versus floating). We use interest rate swaps designated as hedges to increase the percentage of floating rate
debt, subject to market conditions.
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