Article 2.
The following discussion should be read in conjunction with the condensed consolidated financial statements and the notes to those statements included elsewhere in this report on Form 10-Q. This report on Form 10-Q contains certain statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future performance and involve certain risks, uncertainties, and assumptions that are difficult to predict. Actual outcomes and results may differ materially from those expressed in, or implied by, our forward-looking statements. Words such as "expects," "intends," "targets," "anticipates," "believes," "estimates," "guides," "provides guidance," "provides outlook," and other similar expressions or future or conditional verbs such as "may," "will," "should," "would," "could," and "might" are intended to identify such forward-looking statements. Readers of the Form 10-Q ofThe Western Union Company (the "Company," "Western Union ," "we," "our," or "us") should not rely solely on the forward-looking statements and should consider all uncertainties and risks discussed in the Risk Factors section and throughout the Annual Report on Form 10-K for the year endedDecember 31, 2020 . The statements are only as of the date they are made, and the Company undertakes no obligation to update any forward-looking statement. Possible events or factors that could cause results or performance to differ materially from those expressed in our forward-looking statements include the following: (i) events related to our business and industry, such as: changes in general economic conditions and economic conditions in the regions and industries in which we operate, including global economic downturns and trade disruptions, or significantly slower growth or declines in the money transfer, payment service, and other markets in which we operate, including downturns or declines related to interruptions in migration patterns or other events, such as public health emergencies, epidemics, or pandemics such as COVID-19, civil unrest, war, terrorism, or natural disasters, or non-performance by our banks, lenders, insurers, or other financial services providers; failure to compete effectively in the money transfer and payment service industry, including among other things, with respect to price, with global and niche or corridor money transfer providers, banks and other money transfer and payment service providers, including digital, mobile and internet-based services, card associations, and card-based payment providers, and with digital currencies and related protocols, and other innovations in technology and business models; political conditions and related actions, including trade restrictions and government sanctions, inthe United States and abroad, which may adversely affect our business and economic conditions as a whole, including interruptions ofUnited States or other government relations with countries in which we have or are implementing significant business relationships with agents, clients, or other partners; deterioration in customer confidence in our business, or in money transfer and payment service providers generally; failure to maintain our agent network and business relationships under terms consistent with or more advantageous to us than those currently in place; our ability to adopt new technology and develop and gain market acceptance of new and enhanced services in response to changing industry and consumer needs or trends; changes in, and failure to manage effectively, exposure to foreign exchange rates, including the impact of the regulation of foreign exchange spreads on money transfers and payment transactions; any material breach of security, including cybersecurity, or safeguards of or interruptions in any of our systems or those of our vendors or other third parties; cessation of or defects in various services provided to us by third-party vendors; mergers, acquisitions, and the integration of acquired businesses and technologies into our Company, divestitures, and the failure to realize anticipated financial benefits from these transactions, and events requiring us to write down our goodwill; decisions to change our business mix; our ability to realize the anticipated benefits from restructuring-related initiatives, which may include decisions to downsize or to transition operating activities from one location to another, and to minimize any disruptions in our workforce that may result from those initiatives; failure to manage credit and fraud risks presented by our agents, clients, and consumers; changes in tax laws or their interpretation, any subsequent regulation, and potential related state income tax impacts, and unfavorable resolution of tax contingencies; adverse rating actions by credit rating agencies; our ability to protect our trademarks, patents, copyrights, and other intellectual property rights and to defend ourselves against potential intellectual property infringement claims; our ability to attract and retain qualified key employees and to manage our workforce successfully; material changes in the market value or liquidity of securities that we hold; restrictions imposed by our debt obligations; (ii) events related to our regulatory and litigation environment, such as: liabilities or loss of business resulting from a failure by us, our agents, or their subagents to comply with laws and regulations and 37
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regulatory or judicial interpretations thereof, including laws and regulations designed to protect consumers, or detect and prevent money laundering, terrorist financing, fraud, and other illicit activity; increased costs, operational burden or loss of business due to regulatory initiatives and changes in laws, including changes in interpretations, resulting in increasing regulations and industry practices and standards inthe United States and abroad, affecting us, our agents, or their subagents, our external business partners such as financial institutions, or the banks with which we or our agents maintain bank accounts needed to provide our services, including related to anti-money laundering regulations, anti-fraud measures, our licensing arrangements, customer due diligence, agent and subagent due diligence, registration and monitoring requirements, consumer protection requirements, remittances, and immigration; liabilities, increased costs or loss of business and unanticipated developments resulting from governmental investigations and consent agreements with or enforcement actions by regulators; liabilities resulting from litigation, including class-action lawsuits and similar matters, and regulatory enforcement actions, including costs, expenses, settlements, and judgments; failure to comply with regulations and evolving industry standards regarding consumer privacy, data use, the transfer of personal data between jurisdictions, and information security, including with respect to the General Data Protection Regulation in theEuropean Union and the California Consumer Privacy Act; failure to comply with the Dodd-Frank Wall Street Reform and Consumer Protection Act, as well as regulations issued pursuant to it and the actions of theConsumer Financial Protection Bureau and similar legislation and regulations enacted by other governmental authorities inthe United States and abroad related to consumer protection and derivative transactions; effects of unclaimed property laws or their interpretation or the enforcement thereof; failure to maintain sufficient amounts or types of regulatory capital or other restrictions on the use of our working capital to meet the changing requirements of our regulators worldwide; changes in accounting standards, rules and interpretations, or industry standards affecting our business; and (iii) other events, such as: catastrophic events; and management's ability to identify and manage these and other risks.
Overview
We are one of the leading providers of money transfer and payment services, operating in two lines of business:
Consumer to Consumer – Our operational consumer-to-consumer segment facilitates
money transfers, which are sent from our retail locations around the world or
via websites and mobile devices including our fast growing money transfer
transactions made and funded through websites and mobile apps
? marketed under our brands (“westernunion.com”) and transactions initiated on
websites and mobile apps hosted by our third party white label or
co-branded digital partners (with westernunion.com, “Digital Money
Transfer “). Our money transfer service is provided through a
global network. This service is available for international cross-border transfers and, in certain countries, intra-country transfers.
Business Solutions – Our Business Solutions operating segment facilitates
payment and foreign exchange solutions, mainly cross-border, cross-currency
transactions, for small and medium-sized businesses and other organizations and
people. Most of the segment’s activity concerns the exchange of
? currency at spot rates, which allows customers to make cross currency payments.
In addition, in some countries we sell currency futures and options
contracts for customers to facilitate future payments. At
has entered into an agreement to sell our Business Solutions activity to Goldfinch
All businesses and other services that have not been classified in the above segments are reported as Other, which primarily includes our bill payment services which facilitate payments from consumers to businesses and other organizations and our money order services. Our other services, in addition to certain corporate costs such as costs related to strategic initiatives, including costs for the review and closing of mergers, acquisitions, and divestitures, are also included in Other. Additional information on our segments is provided in the Segment Discussion below. 38 Table of Contents Results of Operations The following discussion of our consolidated results of operations and segment results refers to the three and nine months endedSeptember 30, 2021 compared to the same periods in 2020. The results of operations should be read in conjunction with the discussion of our segment results of operations, which provide more detailed discussions concerning certain components of the Condensed Consolidated Statements of Income. All significant intercompany accounts and transactions between our segments have been eliminated. The below information has been prepared in conformity with generally accepted accounting principles inthe United States of America ("GAAP") unless otherwise noted. All amounts provided in this section are rounded to the nearest tenth of a million, except as otherwise noted. As a result, the percentage changes and margins disclosed herein may not recalculate precisely using the rounded amounts provided. InMarch 2020 , theWorld Health Organization declared the outbreak associated with a novel coronavirus a pandemic ("COVID-19"), and governments throughout the world instituted various actions such as lockdowns, stay-at-home orders, travel restrictions, and closures of non-essential businesses in an effort to reduce the spread of COVID-19. These actions negatively impacted both the demand for and our ability to offer our retail services, primarily in 2020, through a portion of our locations and our agent locations. However, sinceMarch 2020 , we have also experienced significant revenue growth from westernunion.com and other digital transactions, as further described below. The duration and severity of the pandemic as well as the responses of government authorities to the pandemic, the macro economic consequences, and the impacts on consumer behavior are uncertain. We expect that our consolidated and segment results will continue to be impacted as long as such factors persist. Our revenues and operating income for the three and nine months endedSeptember 30, 2021 were impacted by fluctuations inthe United States dollar compared to foreign currencies. Fluctuations inthe United States dollar compared to foreign currencies, net of the impact of foreign currency hedges, resulted in an increase to revenues of$2.8 million and$33.1 million for the three and nine months endedSeptember 30, 2021 , respectively, relative to the corresponding periods in the prior year. Fluctuations inthe United States dollar compared to foreign currencies positively impacted operating income by$4.4 million and$24.0 million for the three and nine months endedSeptember 30, 2021 , respectively, relative to the corresponding periods in the prior year. OnAugust 4, 2021 , we entered into an agreement to sell our Business Solutions business, as described above, toGoldfinch Partners LLC andThe Baupost Group for cash consideration of$910 million , subject to regulatory and working capital adjustments. The divestiture is expected to result in a gain on the sale and is subject to regulatory approval and other closing conditions. The sale is expected to be completed in two closings, with the entirety of the cash consideration due at the first closing. The first closing is expected to be completed during the first quarter of 2022 and to exclude the operations in theEuropean Union and theUnited Kingdom . The second closing, comprised of the operations in theEuropean Union and theUnited Kingdom , is currently expected by late 2022. Business Solutions revenues were$116.8 million and$89.1 million for the three months endedSeptember 30, 2021 and 2020, respectively, and$312.6 million and$266.9 million for the nine months endedSeptember 30, 2021 and 2020, respectively. Business Solutions direct operating expenses, which exclude corporate allocations, were$77.1 million and$77.0 million for the three months endedSeptember 30, 2021 and 2020, respectively, and$244.5 million and$233.3 million for the nine months endedSeptember 30, 2021 and 2020, respectively. Operating costs directly associated with this divestiture and incurred through the three and nine months endedSeptember 30, 2021 were$5.2 million and$10.7 million , respectively. 39 Table of Contents
The following table presents our consolidated operating results for the three and nine months ended.
Three Months EndedSeptember 30 , Nine Months EndedSeptember 30 ,
(in millions, except per share amounts) 2021 2020 %
Change 2021 2020 % Change Revenues$ 1,286.3 $ 1,258.5 2 %$ 3,786.0 $ 3,563.2 6 % Expenses: Cost of services 720.1 721.7 0 % 2,181.1 2,067.3 6 %
Selling, general, and administrative 247.6 251.6
(2) % 798.6 755.7 6 % Total expenses 967.7 973.3 (1) % 2,979.7 2,823.0 6 % Operating income 318.6 285.2 12 % 806.3 740.2 9 % Other income/(expense): Interest income 0.4 0.5 (21) % 1.1 2.9 (62) % Interest expense (25.7) (28.2) (9) % (79.7) (90.4) (12) % Other income/(expense), net (1.8) 3.5 (a) 26.8 3.4 (a) Total other expense, net (27.1) (24.2) 11 % (51.8) (84.1) (38) % Income before income taxes 291.5 261.0 12 % 754.5 656.1 15 % Provision for income taxes 58.8 32.4 81 % 117.5 88.9 32 % Net income$ 232.7 $ 228.6 2 %$ 637.0 $ 567.2 12 % Earnings per share: Basic$ 0.57 $ 0.56 2 %$ 1.56 $ 1.38 13 % Diluted$ 0.57 $ 0.55 4 %$ 1.55 $ 1.37 13 % Weighted-average shares outstanding: Basic 406.3 411.6 409.1 412.5 Diluted 408.0 414.6 411.3 415.5
(a) Calculation not significant.
Revenues Overview Revenues are primarily derived from consideration paid by customers to transfer money. These revenues vary by transaction based upon factors such as channel, send and receive locations, the principal amount sent, whether the money transfer involves different send and receive currencies, the difference between the exchange rate we set to the customer and the rate available in the wholesale foreign exchange market, and speed of service, as applicable. We also offer several other services, including foreign exchange and payment services and other bill payment services, for which revenue is impacted by similar factors. Due to the significance of the effect that foreign exchange fluctuations againstthe United States dollar can have on our reported revenues and the significance of our Consumer-to-Consumer segment to our overall results, constant currency results have been provided in the table below for consolidated revenues and for our Consumer-to-Consumer segment revenues. Constant currency results assume foreign revenues are translated from foreign currencies tothe United States dollar, net of the effect of foreign currency hedges, at rates consistent with those in the same period of the prior year. Constant currency measures are non-GAAP financial measures and are provided so that revenue can be viewed without the effect of fluctuations in foreign currency exchange rates, which is consistent with how management evaluates our revenue results and trends. We believe that these measures provide management and investors with information about revenue results and trends that eliminates currency volatility, thereby providing greater clarity regarding, and increasing the comparability of, our underlying results and trends. These disclosures are provided in addition to, and not as a substitute for, the percentage change in revenue on a GAAP basis for the three and nine months endedSeptember 30, 2021 compared to the corresponding periods in the prior year. Other companies may calculate and define similarly labeled items differently, which may limit the usefulness of this measure for comparative purposes. 40
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The following table presents our consolidated revenue results for the three and nine months ended.
Three Months Ended September 30, Nine Months Ended September 30, (dollars in millions) 2021 2020 % Change 2021 2020 % Change Revenues, as reported - (GAAP)$ 1,286.3 $ 1,258.5 2 %$ 3,786.0 $ 3,563.2 6 % Foreign currency impact (a) 0 % (1) % Revenue change, constant currency adjusted - (Non-GAAP) 2 % 5 %
Fluctuations of
of the impact of currency hedges, resulted in an increase in turnover (a) of
the corresponding periods in the prior year.
For the three and nine months endedSeptember 30, 2021 , revenues increased 2% and 6%, respectively, when compared to corresponding periods in the prior year, primarily due to continued recovery from the negative impacts of COVID-19 on our prior year results as previously discussed above, including revenue growth from our Business Solutions segment. For the three and nine months endedSeptember 30, 2021 , transactions and revenues from our Digital Money Transfer services, including from white label partnerships, continued to grow. We believe that our growth in Digital Money Transfer transactions for the nine months endedSeptember 30, 2021 was due, in part, to shifts in consumer behavior to send money through digital channels, including as a result of COVID-19. However, this growth rate began to decelerate in the second quarter of 2021 and has continued to decelerate into the third quarter as a result of the strong growth in Digital Money Transfer transactions we experienced in the corresponding periods in the prior year. Fluctuations in the exchange rates betweenthe United States dollar and foreign currencies positively impacted revenue by 1% for the nine months endedSeptember 30, 2021 , compared to the corresponding period in the prior year. Operating Expenses Overview
Improved regulatory compliance
The financial services industry, including money services businesses, continues to be subject to increasingly strict legal and regulatory requirements, and we continue to focus on and regularly review our compliance programs. In connection with these reviews, and in light of growing and rapidly evolving regulatory complexity and heightened attention of, and increased dialogue with, governmental and regulatory authorities related to our compliance activities, we have made, and continue to make, enhancements to our processes and systems designed to detect and prevent money laundering, terrorist financing, and fraud and other illicit activity, and enhancements designed to improve consumer protection. Some of these changes have had, and we believe will continue to have, an adverse effect on our business, financial condition, and results of operations.
Restructuring expenses
OnAugust 1, 2019 , our Board of Directors approved a plan to change our operating model and improve our business processes and cost structure by reorganizing our senior management, including those managers reporting to our chief executive officer, reducing our headcount, and consolidating various facilities. We incurred approximately$150 million of total expenses throughDecember 31, 2020 , with approximately$110 million related to severance and employee-related benefits and approximately$40 million related to costs associated with the relocation of various operations to other Company facilities, facility closures, lease terminations, consulting, and other expenses. As ofDecember 31, 2020 , all expenses associated with this plan have been incurred and substantially all have been paid in cash. In 2020, the plan generated expense savings of more than$50 million . For 2021, we continue to expect the plan to generate expense savings of approximately$100 million , compared to our operating model in effect prior to this plan, which is our estimate and subject to change. For the three and nine months endedSeptember 30, 2020 , we incurred$9.1 million and$24.8 million , respectively, of expenses related to this plan. For the three and nine months endedSeptember 30, 2020 ,$0.8 million and$2.5 million , 41
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respectively, of these expenses have been included in the cost of services, and
These expenses are specific to this initiative; however, the types of expenses associated with this initiative are similar to expenses we have already incurred and can reasonably expect to incur in the future.
Cost of Services
Cost of services primarily consists of agent commissions, which represented approximately 60% of total cost of services for both the three and nine months endedSeptember 30, 2021 . For the three months endedSeptember 30, 2021 , cost of services was flat compared to the corresponding period in the prior year. Decreases in agent commissions in our Consumer-to-Consumer money transfer business were offset by increases in information technology costs and bank fees associated with digital transactions. For the nine months endedSeptember 30, 2021 compared to the corresponding period in the prior year, cost of services increased primarily due to increases in information technology costs, agent commissions in our Consumer-to-Consumer money transfer business, and bank fees associated with digital transactions.
Selling, general and administrative expenses
Selling, general and administrative expenses decreased for the three months endedSeptember 30, 2021 compared to the corresponding period in the prior year primarily due to a reduction in marketing costs. Selling, general, and administrative expenses increased for the nine months endedSeptember 30, 2021 compared to the corresponding period in the prior year due to increases in employee-related expenses, including incentive compensation and as a result of reduced hiring that we implemented in response to COVID-19 in the prior period, marketing costs, and costs related to strategic initiatives, including for the review of mergers, acquisitions, and divestitures, partially offset by a reduction in restructuring-related expenses and fluctuations betweenthe United States dollar and foreign currencies. Total Other Expense, Net Total other expense, net during the nine months endedSeptember 30, 2021 when compared to the corresponding periods in the prior year benefited from a$47.9 million gain recorded from the sale of a substantial majority of the noncontrolling interest we held in a private company for cash proceeds of$50.9 million , partially offset by costs associated with the repayment of our 3.6% unsecured notes due in 2022. Total other expense, net for the three and nine months endedSeptember 30, 2021 compared to the corresponding periods in the prior year benefited from a reduction in interest expense driven by lower average debt balances outstanding and a lower weighted-average interest rate on our outstanding debt. OnJuly 22, 2021 , our Board of Directors approved a plan to terminate and settle our frozen defined benefit pension plan, which was in an overfunded position as ofSeptember 30, 2021 andDecember 31, 2020 . Upon termination and settlement, which is expected in the fourth quarter of 2021 and subject to required notices, filings, and reviews, the pre-tax balance in Accumulated other comprehensive loss associated with the defined benefit pension plan, along with any related costs of the settlement, will be recorded as a component of Total other expense, net, with the related income tax effects recorded in Provision for income taxes, in the Condensed Consolidated Statements of Income. Income Taxes Our provision for income taxes for the three and nine months endedSeptember 30, 2021 and 2020 is based on the estimated annual effective tax rate, in addition to discrete items. Our effective tax rates on pre-tax income were 20.2% and 12.4% for the three months endedSeptember 30, 2021 and 2020, respectively, and 15.6% and 13.5% for the nine months endedSeptember 30, 2021 and 2020, respectively. The increase in our effective tax rate for the three and nine months endedSeptember 30, 2021 compared to the corresponding periods in the prior year was primarily due to increased deferred tax expense arising from changes to certain of our permanent reinvestment assertions related to our decision to classify our Business Solutions business as held for sale in the current period. We have established contingency reserves for a variety of material, known tax exposures. As ofSeptember 30, 2021 , the total amount of tax contingency reserves was$315.3 million , including accrued interest and penalties, net
of related 42 Table of Contents items. Our tax reserves reflect our judgment as to the resolution of the issues involved if subject to judicial review or other settlement. While we believe that our reserves are adequate to cover reasonably expected tax risks, there can be no assurance that, in all instances, an issue raised by a tax authority will be resolved at a financial cost that does not exceed our related reserve. With respect to these reserves, our income tax expense would include: (i) any changes in tax reserves arising from material changes in facts and circumstances (i.e., new information) surrounding a tax issue during the period, and (ii) any difference from our tax position as recorded in the financial statements and the final resolution of a tax issue during the period. Such resolution could materially increase or decrease income tax expense in our consolidated financial statements in future periods and could impact our operating cash flows. Earnings Per Share During the three months endedSeptember 30, 2021 and 2020, basic earnings per share were$0.57 and$0.56 , respectively, and diluted earnings per share were$0.57 and$0.55 , respectively. During the nine months endedSeptember 30, 2021 and 2020, basic earnings per share were$1.56 and$1.38 , respectively, and diluted earnings per share were$1.55 and$1.37 , respectively. Outstanding options to purchaseWestern Union stock and unvested shares of restricted stock are excluded from basic shares outstanding. Diluted earnings per share reflects the potential dilution that could occur if outstanding stock options at the presented dates are exercised and shares of restricted stock have vested. For the three months endedSeptember 30, 2021 and 2020, there were 2.2 million and 1.3 million, respectively, and for both the nine months endedSeptember 30, 2021 and 2020, there were 1.7 million of shares excluded from the diluted earnings per share calculation under the treasury stock method, primarily due to outstanding restricted stock units and options to purchase shares ofWestern Union stock, as the assumed proceeds of the restricted stock and options per unit were above our weighted-average share price during the periods and their effect was anti-dilutive. Earnings per share for both the three and nine months endedSeptember 30, 2021 compared to the corresponding periods in the prior year were impacted by the previously described factors impacting net income and a lower number of shares outstanding. The lower number of shares outstanding is due to stock repurchases exceeding stock issuances related to our stock compensation programs. Segment Discussion
We manage our business around the consumers and businesses we serve and the types of services we offer. Each of our segments addresses a different combination of consumer groups, distribution networks, and services offered. Our segments are Consumer-to-Consumer and Business Solutions. OnAugust 4, 2021 , we entered into an agreement to sell our Business Solutions business toGoldfinch Partners LLC andThe Baupost Group , as further described above. During the three and nine months endedSeptember 30, 2020 we incurred$9.1 million and$24.8 million , respectively, of restructuring-related expenses, as further discussed above. While certain of these expenses may be identifiable to our segments, primarily to our Consumer-to-Consumer segment, they have been excluded from the measurement of segment operating income provided to the Chief Operating Decision Maker for purposes of assessing segment performance and decision making with respect to resource allocation.
The following table presents the components of segment revenues as a percentage of the consolidated totals for the three and nine months ended.
Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 Consumer-to-Consumer 86 % 88 % 87 % 87 % Business Solutions 9 % 7 % 8 % 7 % Other 5 % 5 % 5 % 6 % 100 % 100 % 100 % 100 % 43 Table of Contents
Consumer-to-consumer segment
The following table presents the operating results of our consumer-to-consumer segment for the three and nine months ended.
Three Months Ended September 30, Nine Months Ended September 30, (dollars and transactions in millions) 2021 2020 % Change 2021 2020 % Change Revenues$ 1,104.5 $ 1,106.5 0 %$ 3,282.5 $ 3,098.5 6 % Operating income$ 268.2 $ 272.4 (2) %$ 708.1 $ 695.1 2 % Operating income margin 24 % 25 % 22 % 22 % Key indicator: Consumer-to-Consumer transactions 76.6 77.3
(1) % 227.6 212.1 7 %
Our Consumer-to-Consumer money transfer service facilitates money transfers sent from our retail agent locations worldwide and our Digital Money Transfer services. The segment includes five geographic regions whose functions are primarily related to generating, managing, and maintaining agent relationships and localized marketing activities. We include Digital Money Transfer transactions in our regions, including transactions from our arrangements with financial institutions and other third parties to enable such entities to offer money transfer services to their own customers under their brands. By means of common processes and systems, these regions, including Digital Money Transfer transactions, create one interconnected global network for consumer transactions, thereby constituting one Consumer-to-Consumer money transfer business and one operating segment. Transaction volume is the primary generator of revenue in our Consumer-to-Consumer segment. A Consumer-to-Consumer transaction constitutes the transfer of funds to a designated recipient utilizing one of our consumer money transfer services. The geographic split for transactions and revenue in the table that follows, including Digital Money Transfer transactions, is determined based upon the region where the money transfer is initiated. Included in each region's transaction and revenue percentages in the tables below are Digital Money Transfer transactions for the three and nine months endedSeptember 30, 2021 and 2020. Where reported separately in the discussion below, Digital Money Transfer, and its subset westernunion.com, consist of 100% of the transactions conducted and funded through those respective channels. The table below sets forth revenue and transaction changes by geographic region compared to the same period in the prior year. Consumer-to-Consumer segment constant currency revenue growth/(decline) is a non-GAAP financial measure, as further discussed in Revenues Overview above. 44 Table of Contents Three Months Ended September 30, 2021 Nine Months Ended September 30, 2021 Revenue Constant Constant Growth/(Decline), Foreign Currency Revenue Foreign Currency as Exchange Revenue Transaction Growth Exchange Revenue Transaction Reported - Translation
Growth / (Decline) (a) – Growth / as presented – Conversion Growth (a) – Growth /
(GAAP) Impact (Non-GAAP) (Decline) (GAAP) Impact (Non-GAAP) (Decline) Consumer-to-Consumer regional growth/(decline): North America (United States & Canada) ("NA") (2) % 0 % (2) % (5) % 1 % 0 % 1 % 0 % Europe andRussia /CIS ("EU & CIS") (3) % 2 % (5) % 3 % 7 % 4 % 3 % 18 %Middle East ,Africa , and South Asia ("MEASA") (2) % 0 % (2) % 2 % 5 % 0 % 5 % 12 % Latin America and the Caribbean ("LACA") 25 % (1) % 26 % 10 % 28 % (2) % 30 % 12 % East Asia and Oceania ("APAC") 1 % 2 % (1) % (13) % 9 % 5 % 4 % (5) % Total Consumer-to-Consumer growth: 0 % 1 % (1) % (1) % 6 % 2 % 4 % 7 % Digital Money Transfer(b) 15 % 1 % 14 % 19 % 25 % 1 % 24 % 38 % westernunion.com(b) 12 % 1 % 11 % 9 % 21 % 1 % 20 % 24 %
Income growth in constant currencies assumes that income denominated in foreign currencies (a) is converted into
currency hedges, at rates consistent with those of
previous period.
Revenue from digital money transfer has been included in the above regions. As (b) stated above, westernunion.com is a subset of Digital Money Transfer and is
included in regions and digital money transfer revenues.
The table below sets forth regional revenues as a percentage of our Consumer-to-Consumer revenue for the three and nine months endedSeptember 30, 2021 and 2020: Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 Consumer-to-Consumer revenue as a percentage of segment revenue: NA 37 % 38 % 37 % 39 % EU & CIS 32 % 33 % 33 % 32 % MEASA 15 % 16 % 15 % 16 % LACA 9 % 7 % 9 % 7 % APAC 7 % 6 % 6 % 6 % Digital Money Transfer, which is included in the regional percentages above, represented approximately 24% and 21% of our Consumer-to-Consumer revenues for the three months endedSeptember 30, 2021 and 2020, respectively, and 24% and 20% for the nine months endedSeptember 30, 2021 and 2020, respectively. 45
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Our consumers transferred$27.7 billion and$26.9 billion in Consumer-to-Consumer principal for the three months endedSeptember 30, 2021 and 2020, of which$26.5 billion and$25.5 billion related to cross-border principal for the same corresponding periods described above, respectively. Our consumers transferred$81.3 billion and$69.4 billion in Consumer-to-Consumer principal for the nine months endedSeptember 30, 2021 and 2020, of which$77.6 billion and$65.3 billion related to cross-border principal for the same corresponding periods described above, respectively. The increase in principal and cross-border principal transferred during the three and nine months endedSeptember 30, 2021 compared to the corresponding periods in the prior year was primarily attributable to growth in Digital Money Transfer. Consumer-to-Consumer principal is the amount of consumer funds transferred to the designated recipient. Cross-border principal is the amount of consumer funds transferred to a designated recipient in a country or territory that differs from the country or territory from which the transaction was initiated. Consumer-to-Consumer principal and cross-border principal are metrics used by management to monitor and better understand the growth in our underlying business relative to competitors, as well as changes in our market share of global remittances.
Income
Consumer-to-Consumer money transfer revenue was flat and transactions decreased 1% for the three months endedSeptember 30, 2021 , and revenue increased 6% and transactions increased 7% for the nine months endedSeptember 30, 2021 compared to the corresponding periods in the prior year. For the nine months endedSeptember 30, 2021 , revenues increased when compared to corresponding periods in the prior year, primarily due to continued recovery from the negative impacts of COVID-19 on our prior year results as previously discussed above. For the three and nine months endedSeptember 30, 2021 , transactions and revenues from our Digital Money Transfer services, including from white label partnerships, continued to grow. We believe that our growth in Digital Money Transfer transactions for the nine months endedSeptember 30, 2021 was due, in part, to shifts in consumer behavior to send money through digital channels, including as a result of COVID-19. However, this growth rate began to decelerate in the second quarter of 2021 and has continued to decelerate into the third quarter as a result of the strong growth in Digital Money Transfer transactions we experienced in the corresponding periods in the prior year. Fluctuations inthe United States dollar compared to foreign currencies, net of the impact of foreign currency hedges, positively impacted revenue by 1% and 2% for the three and nine months endedSeptember 30, 2021 compared to the corresponding periods in the prior year. NA region revenue decreased for the three months endedSeptember 30, 2021 compared to the corresponding period in the prior year, primarily due to a decline in cross-border transaction growth, including transactions sent fromthe United States toCuba , as these money transfer services were suspended in the fourth quarter of 2020, and transactions sent and received withinthe United States . For the three months endedSeptember 30, 2021 compared to the corresponding period in the prior year, the EU & CIS region experienced transaction volume and revenue declines from our retail services, partially offset by revenue growth inRussia , and transaction volumes for both the EU & CIS and MEASA regions continued to benefit from growth in Digital Money Transfer, including white label partnerships, for both the three and nine months endedSeptember 30, 2021 . The revenue growth in the LACA region was primarily due to an increase in principal transferred during the three and nine months endedSeptember 30, 2021 compared to the corresponding periods in the prior year, including due to the prolonged negative impacts of COVID-19 in this region, including retail agent location closures, during the prior periods. Price increases in APAC were offset by transaction declines for the three and nine months endedSeptember 30, 2021 . Digital Money Transfer revenue, including westernunion.com, increased during the three and nine months endedSeptember 30, 2021 compared to the corresponding periods in the prior year due to an increase in digital transaction volumes, partially offset by price reductions in the nine months endedSeptember 30, 2021 . We have historically implemented price reductions or price increases throughout many of our global corridors. We will likely continue to implement price changes from time to time in response to competition and other factors. Price reductions generally reduce margins and adversely affect financial results in the short term and may also adversely affect financial results in the long term if transaction volumes do not increase sufficiently. Price increases may adversely affect transaction volumes, as consumers may not use our services if we fail to price them appropriately. 46 Table of Contents Operating Income Consumer-to-Consumer operating income decreased 2% for the three months endedSeptember 30, 2021 compared to the corresponding period in the prior year primarily due to increases in information technology costs, partially offset by a decrease in agent commissions. Consumer-to-Consumer operating income increased 2% for the nine months endedSeptember 30, 2021 , compared to the corresponding period in the prior year primarily due to the increase in revenues, as discussed above, and fluctuations inthe United States dollar compared to foreign currencies, partially offset by increases in information technology costs, employee-related expenses, including incentive compensation and as a result of reduced hiring that we implemented in response to COVID-19 in the prior year period, and marketing costs. Business Solutions
The following table presents the operating results of our Business Solutions segment for the three and nine months ended.
Three Months Ended September 30, Nine Months Ended September 30, (dollars in millions) 2021 2020 % Change 2021 2020 % Change Revenues$ 116.8 $ 89.1 31 %$ 312.6 $ 266.9 17 % Operating income$ 38.4 $ 9.4 (a)$ 61.9 $ 24.6 (a) Operating income margin 33 % 11 % 20 % 9 %
(a) Calculation not significant.
Revenues Business Solutions revenue increased 31% and 17% for the three and nine months endedSeptember 30, 2021 , respectively, compared to the corresponding periods in the prior year primarily due to an increase in payment services activity inEurope andNorth America , and increased hedging activity. We believe this increase was due, in part, to the continued recovery from the downturn in economic activity and trade caused by the negative impacts of COVID-19 on our prior year results. Fluctuations in the exchange rates betweenthe United States dollar and foreign currencies positively impacted revenue by 3% and 6% for the three and nine months endedSeptember 30, 2021 . Operating Income
For the three and nine months ended
Other
Other mainly consists of our cash bill payment business in
and
The following table sets forth Other results for the three and nine months endedSeptember 30, 2021 and 2020: Three Months Ended September 30, Nine Months Ended September 30, (dollars in millions) 2021 2020 % Change 2021 2020 % Change Revenues$ 65.0 $ 62.9 3 %$ 190.9 $ 197.8 (4) % Operating income$ 12.0 $ 12.5 (6) %$ 36.3 $ 45.3 (20) % Operating income margin 18 % 20 % 19 % 23 % 47 Table of Contents Revenues
For the three months endedSeptember 30, 2021 compared to the corresponding period in the prior year, Other revenues increased due to an increase in transaction volumes in our cash-based bill payments services offered at retail locations, in part due to continued recovery from the negative impacts of COVID-19 on our prior year results as previously discussed above, partially offset by the strengthening ofthe United States dollar against the Argentine peso. For the nine months endedSeptember 30, 2021 compared to the corresponding period in the prior year, Other revenues decreased due to the strengthening ofthe United States dollar against the Argentine peso, partially offset by the increase in transaction volumes in our cash-based bill payment services offered at retail locations. Operating Income Other operating income decreased for both the three and nine months endedSeptember 30, 2021 compared to the corresponding periods in the prior year primarily due to an increase in costs associated with strategic initiatives, including for the review of mergers, acquisitions, and divestitures. For the three months endedSeptember 30, 2021 , Other operating income also benefited from an increase in revenues, as discussed above.
Capital resources and liquidity
Our primary source of liquidity has been cash generated from our operating activities, primarily from net income and fluctuations in working capital. Our working capital is affected by the timing of payments for employee and agent incentives, interest payments on our outstanding borrowings and timing of income tax payments, among other items. Many of our annual employee incentive compensation and agent incentive payments are made in the first quarter following the year they were incurred. The majority of our interest payments are due in the second and fourth quarters. The annual payments resulting fromthe United States tax reform legislation enacted in 2017 (the "Tax Act") include amounts related tothe United States taxation of certain previously undistributed earnings of foreign subsidiaries. These payments are typically due in the second quarter of each year through 2025. Our future cash flows could be impacted by a variety of factors, some of which are out of our control. These factors include, but are not limited to, changes in economic conditions, especially those impacting migrant populations and including as a result of COVID-19 related impacts, changes in income tax laws or the status of income tax audits, including the resolution of outstanding tax matters, and the settlement or resolution of legal contingencies. Substantially all of our cash flows from operating activities have been generated from subsidiaries. Most of these cash flows are generated from our regulated subsidiaries. Our regulated subsidiaries may transfer all excess cash to the parent company for general corporate use, except for assets subject to legal or regulatory restrictions, including: (i) requirements to maintain cash and other qualifying investment balances, free of any liens or other encumbrances, related to the payment of certain of our money transfer and other payment obligations, (ii) other legal or regulatory restrictions, including statutory or formalized minimum net worth requirements, and (iii) restrictions on transferring assets outside of the countries where these assets are located. We currently believe we have adequate liquidity to meet our business needs, including payments under our debt and other obligations, through our existing cash balances, our ability to generate cash flows through operations, and our$1.5 billion revolving credit facility ("Revolving Credit Facility"), which expires inJanuary 2025 and supports our commercial paper program. Our commercial paper program enables us to issue unsecured commercial paper notes in an amount not to exceed$1.5 billion outstanding at any time, reduced to the extent of any borrowings outstanding on our Revolving Credit Facility. As ofSeptember 30, 2021 , we had no outstanding borrowings on our Revolving Credit Facility and$120.0 million of outstanding borrowings on the commercial paper program. To help ensure availability of our worldwide cash where needed, we utilize a variety of planning and financial strategies, including decisions related to the amounts, timing, and manner by which cash is made available from our international subsidiaries. These decisions can influence our overall tax rate and impact our total liquidity. We regularly evaluate, taking tax consequences and other factors into consideration, ourUnited States cash requirements and also the 48 Table of Contents
potential uses of international cash to determine the appropriate level of dividend repatriation from our foreign source income.
As ofSeptember 30, 2021 andDecember 31, 2020 , we had Cash and cash equivalents of$1,046.4 million , which included$43.0 million related to Business Solutions, and$1,428.2 million , respectively. As described in Part I, Item 1, Financial Statements, Note 4, Assets Held for Sale and Investment Activities, we have agreed to sell our Business Solutions business. We expect that our use of the net proceeds on the sale, after taxes on the gain from the transaction, will be consistent with our objective to maintain strong liquidity and a capital structure consistent with investment-grade credit ratings, as further described below. In many cases, we receive funds from money transfers and certain other payment services before we settle the payment of those transactions. These funds, referred to as Settlement assets on our Condensed Consolidated Balance Sheets, are not used to support our operations. However, we earn income from investing these funds. We maintain a portion of these settlement assets in highly liquid investments, classified as Cash and cash equivalents within Settlement assets, to fund settlement obligations. Investment securities, classified within Settlement assets on the Condensed Consolidated Balance Sheets, were$1,437.9 million and$1,990.6 million as ofSeptember 30, 2021 andDecember 31, 2020 , respectively, and consist primarily of highly-rated state and municipal debt securities, including fixed-rate term notes and variable-rate demand notes. The substantial majority of our investment securities are held in order to comply with state licensing requirements inthe United States and are required to have credit ratings of "A-" or better from a major credit rating agency. Investment securities are exposed to market risk due to changes in interest rates and credit risk. We regularly monitor credit risk and attempt to mitigate our exposure by investing in highly-rated securities and diversifying our investment portfolio. Our investment securities are also actively managed with respect to concentration. As ofSeptember 30, 2021 , all investments with a single issuer and each individual security represented less than 10% of our investment securities portfolio.
Cash flow from operating activities
Cash provided by operating activities increased to$686.0 million during the nine months endedSeptember 30, 2021 , from$585.6 million in the corresponding period in the prior year. Cash provided by operating activities can be impacted by changes to our consolidated net income, in addition to fluctuations in our working capital balances, among other factors.
Funding resources
OnMarch 9, 2021 , we issued$600.0 million and$300.0 million of aggregate principal amount of 1.350% and 2.750% unsecured notes dueMarch 15, 2026 ("2026 Notes") andMarch 15, 2031 ("2031 Notes"), respectively. Interest with respect to these notes is payable semi-annually in arrears onMarch 15 andSeptember 15 of each year, beginning onSeptember 15, 2021 . If a change of control triggering event occurs, holders of the 2026 Notes and 2031 Notes may require us to repurchase some or all of their notes at a price equal to 101% of the principal amount of their notes, plus any accrued and unpaid interest. We may redeem the 2026 Notes and the 2031 Notes, in whole or in part, at any time prior toFebruary 15, 2026 andDecember 15, 2030 , respectively, at the greater of par or a price based on the applicable treasury rate plus 15 and 25 basis points, respectively. We may redeem the 2026 Notes and the 2031 Notes at any time afterFebruary 15, 2026 andDecember 15, 2030 , respectively, at a price equal to par, plus accrued interest. Proceeds from the 2026 Notes and 2031 Notes and cash, including cash generated from operations, were used to repay$650.0 million of the term loan facility in the first quarter of 2021 and$500.0 million of the aggregate principal amount of 3.600% unsecured notes due inMarch 2022 ("2022 Notes") in the second quarter of 2021.
From
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Our Revolving Credit Facility provides for unsecured financing facilities in an aggregate amount of$1.5 billion , including a$250.0 million letter of credit sub-facility. Interest due under the Revolving Credit Facility is fixed for the term of each borrowing and is payable according to the terms of that borrowing. Generally, interest is calculated using a selected LIBOR rate plus an interest rate margin of 110 basis points. A facility fee is also payable quarterly at an annual rate of 15 basis points on the total facility, regardless of usage. Both the interest rate margin and facility fee percentage are based on certain of our credit ratings. The purpose of our Revolving Credit Facility, which is diversified through a group of 19 participating institutions, is to provide general liquidity and to support our commercial paper program, which we believe enhances our short-term credit rating. The largest commitment from any single financial institution within the total committed balance of$1.5 billion is approximately 11%. As ofSeptember 30, 2021 , we had no outstanding borrowings under our Revolving Credit Facility. If the amount available to borrow under the Revolving Credit Facility decreased, or if the Revolving Credit Facility were eliminated, the cost and availability of borrowing under the commercial paper program may be impacted. Pursuant to our commercial paper program, we may issue unsecured commercial paper notes in an amount not to exceed$1.5 billion outstanding at any time, reduced to the extent of borrowings outstanding on our Revolving Credit Facility. Our commercial paper borrowings may have maturities of up to 397 days from date of issuance. Interest rates for borrowings are based on market rates at the time of issuance. We had$120.0 million of commercial paper borrowings outstanding as ofSeptember 30, 2021 . Our commercial paper borrowings as ofSeptember 30, 2021 had a weighted-average annual interest rate of approximately 0.2% and a weighted-average term of approximately 1 day. During the nine months endedSeptember 30, 2021 , the average commercial paper balance outstanding was$141.4 million , and the maximum balance outstanding was$575.0 million . Proceeds from our commercial paper borrowings were used for general corporate purposes and working capital needs. Cash Priorities Liquidity Our objective is to maintain strong liquidity and a capital structure consistent with investment-grade credit ratings. We have existing cash balances, cash flows from operating activities, access to the commercial paper markets, and our Revolving Credit Facility available to support the needs of our business. Our ability to grow the business, make investments in our business, make acquisitions, return capital to shareholders, including through dividends and share repurchases, and service our debt and tax obligations will depend on our ability to continue to generate excess operating cash through our operating subsidiaries and to continue to receive dividends from those operating subsidiaries, our ability to obtain adequate financing and our ability to identify acquisitions that align with our long-term strategy. For additional information, please refer to Part II, Item 5, Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases ofEquity Securities in our Annual Report on Form 10-K for the year endedDecember 31, 2020 .
Investment in
We entered into an agreement inNovember 2020 , and as subsequently amended, to acquire an ownership interest in stc Bank (formerlySaudi Digital Payments Company ), a subsidiary of Saudi Telecom Company and one of our Consumer-to-Consumer digital white label partners. Under the terms of the amended agreement, we agreed to invest$200.0 million for a 15% investment in stc Bank, and this transaction closed inOctober 2021 .
Capital expenditure
The total aggregate amount paid for contract costs, purchases of property and equipment, and purchased and developed software was$180.2 million and$106.3 million for the nine months endedSeptember 30, 2021 and 2020, respectively. Amounts paid for new and renewed agent contracts vary depending on the terms of existing contracts as well as the timing of new and renewed contract signings. Other capital expenditures during these periods included investments in our information technology infrastructure and purchased and developed software. 50
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During the first quarter of 2021, we transitioned a majority of our money transfer settlement processes to our new global platform. This project has been and will continue to be complex, as we have defined, created, and implemented new settlement solutions that are specific to the needs of our agents and other partners,who span a number of countries and regulatory regimes. In future periods, we will transition the remaining processes, primarily including money transfers sent fromthe United States andCanada , to the new platform. We expect that this will require the continued assistance of our third-party software provider, with whom we have worked on this project over the past several years. For further discussion of the risks associated with interruptions in our systems, see risk factor, "Interruptions in our systems, including as a result of cyber attacks, or disruptions in our workforce may have a significant adverse effect on our business" in Part I, Item 1A, Risk Factors in our Annual Report on Form 10-K for the year endedDecember 31, 2020 .
Share buybacks and dividends
During the nine months endedSeptember 30, 2021 and 2020, 9.6 million and 8.5 million shares were repurchased for$225.0 million and$217.4 million , respectively, excluding commissions, at an average cost of$23.45 and$25.45 , respectively. As ofSeptember 30, 2021 ,$557.6 million remained available under the share repurchase authorization approved by our Board of Directors throughDecember 31, 2021 . Our Board of Directors declared quarterly cash dividends of$0.235 per common share in each of the first three quarters of 2021, representing$287.6 million in total dividends. Material Cash Requirements Debt Service Requirements
Our 2021 and future debt service requirements will include payments on all outstanding indebtedness, including any borrowings under our commercial paper program. Our next scheduled principal payment on our outstanding notes and term loan is in 2023.
United States Federal Tax Liability in 2017
The Tax Act imposed a tax on certain of our previously undistributed foreign earnings. This tax charge, combined with our other 2017 United States taxable income and tax attributes, resulted in a 2017 United States federal tax liability of approximately$800 million , of which approximately$541 million remained as ofSeptember 30, 2021 . We have elected to pay this liability in periodic installments through 2025. Under the terms of the law, we are required to pay the remaining installment payments as summarized in the Capital Resources and Liquidity discussion located in Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year endedDecember 31, 2020 . These payments have affected and will continue to adversely affect our cash flows and liquidity and may adversely affect future share repurchases.
Operating leases
We lease real properties for use as administrative and sales offices, in addition to transportation, office, and other equipment. Refer to Part II, Item 8, Financial Statements and Supplemental Data, Note 13, Leases, in our Annual Report on Form 10-K for the year endedDecember 31, 2020 for details on our leasing arrangements, including future maturities of our operating lease liabilities. We have no material off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on our financial condition, results of operations, liquidity, capital expenditures, or capital resources.
Other commercial commitments
We had approximately$470 million in outstanding letters of credit and bank guarantees as ofSeptember 30, 2021 primarily held in connection with safeguarding consumer funds, lease arrangements, and certain agent agreements. We expect to renew most of our letters of credit and bank guarantees prior
to expiration. 51 Table of Contents As ofSeptember 30, 2021 , our total amount of unrecognized income tax benefits was$372.4 million , including associated interest and penalties. The timing of related cash payments for substantially all of these liabilities is inherently uncertain because the ultimate amount and timing of such liabilities are affected by factors which are variable and outside our control.
Critical accounting conventions and estimates
The preparation of financial statements in conformity with accounting principles generally accepted inthe United States requires management to make estimates and assumptions that affect the amounts and disclosures in the financial statements and accompanying notes. Actual results could differ from those estimates. Our Critical Accounting Policies and Estimates disclosed in Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year endedDecember 31, 2020 , for which there were no material changes, included:
? Income taxes, including tax contingencies
? Derivative financial instruments
?Goodwill ? Other intangible assets ? Legal contingencies
In our Annual Report on Form 10-K for the year endedDecember 31, 2020 , we disclosed that the fair value of the Business Solutions reporting unit was sensitive to changes in projections for revenue growth rates and Earnings before Interest, Taxes, Depreciation, and Amortization ("EBITDA") margins, quantified the decrease in the projected revenue growth rate that would result in the fair value of the reporting unit approximating its carrying value, and described key factors impacting our ability to achieve the projected revenue growth and EBITDA margins. The reporting unit's fair value continues to be sensitive to changes in projected revenue growth rates and EBITDA margins, which are impacted by these same factors. As ofSeptember 30, 2021 , the Business Solutions reporting unit had goodwill of$532.0 million .
Recent accounting positions
Refer to Part I, Item 1, Financial Statements, Note 1, Business and Basis of Presentation for further discussion.
Risk management
We are exposed to market risks arising from changes in market rates and prices, including changes in foreign currency exchange rates and interest rates and credit risk related to our agents and customers. A risk management program is in place to manage these risks.
Foreign currency exchange rate
We provide our services primarily through a network of agent locations in more than 200 countries and territories. We manage foreign exchange risk through the structure of the business and an active risk management process. We currently settle with the substantial majority of our agents inUnited States dollars, Mexican pesos, or euros, requiring those agents to obtain local currency to pay recipients, and we generally do not rely on international currency markets to obtain and pay illiquid currencies. However, in certain circumstances, we settle in other currencies. The foreign currency exposure that does exist is limited by the fact that the majority of transactions are paid by the next day after they are initiated, and agent settlements occur within a few days in most instances. To mitigate this risk further, we enter into short duration foreign currency forward contracts, generally with maturities from a few days up to one month, to offset foreign exchange rate fluctuations between transaction initiation and settlement. We also have exposure to certain foreign currency denominated cash and other asset and liability positions and may utilize foreign currency forward contracts, typically with 52 Table of Contents maturities of less than one year at inception, to offset foreign exchange rate fluctuations on these positions. In certain consumer money transfer, bill payment, and Business Solutions transactions involving different send and receive currencies, we generate revenue based on the difference between the exchange rate set by us to the consumer or business and the rate available in the wholesale foreign exchange market, helping to provide protection against currency fluctuations. We attempt to promptly buy and sell foreign currencies as necessary to cover our net payables and receivables which are denominated in foreign currencies. We use longer-term foreign currency forward contracts to help mitigate risks associated with changes in foreign currency exchange rates on revenues denominated primarily in the euro, and to a lesser degree, the Canadian dollar, the British pound, and other currencies. We use contracts with maturities of up to 36 months at inception to mitigate some of the impact that changes in foreign currency exchange rates could have on forecasted revenues, with a targeted weighted-average maturity of approximately one year. We believe the use of longer-term foreign currency forward contracts provides predictability of future cash flows from our international operations. We have additional foreign exchange risk and associated foreign exchange risk management requirements 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. In certain countries, this business also writes foreign currency forward and option contracts for our customers to facilitate future payments. The majority of these derivative contracts have a duration at inception of less than one year. 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. As ofSeptember 30, 2021 , a hypothetical uniform 10% strengthening or weakening in the value ofthe United States dollar relative to all other currencies in which our net income is generated would have resulted in a decrease/increase to pre-tax annual income of approximately$40 million , based on our forecast of unhedged exposure to foreign currency at that date. There are inherent limitations in this sensitivity analysis, primarily due to the following assumptions: (i) foreign exchange rate movements are linear and instantaneous, (ii) fixed exchange rates between certain currency pairs are retained, (iii) the unhedged exposure is static, and (iv) we would not hedge any additional exposure. As a result, the analysis is unable to reflect the potential effects of more complex market changes that could arise, which may positively or negatively affect income.
Interest rate
We invest in several types of interest-bearing assets, with a total value as ofSeptember 30, 2021 of approximately$2.9 billion . Approximately$1.7 billion of these assets bear interest at floating rates. These assets primarily include cash in banks, money market instruments, and state and municipal variable rate securities and are included in our Condensed Consolidated Balance Sheets within Cash and cash equivalents and Settlement assets. To the extent these assets are held in connection with money transfers and other related payment services awaiting redemption, they are classified as Settlement assets. Earnings on these investments will increase and decrease with changes in the underlying short-term interest rates. The remainder of our interest-bearing assets primarily consists of highly-rated state and municipal debt securities, which are fixed rate term notes. These investments may include investments made from cash received from our money order services, money transfer business, and other related payment services awaiting redemption and are classified within Settlement assets in the Condensed Consolidated Balance Sheets. As interest rates rise, the fair value of these fixed-rate interest-bearing securities will decrease; conversely, a decrease to interest rates would result in an increase to the fair values of the securities. We have classified these investments as available-for-sale within Settlement assets in the Condensed Consolidated Balance Sheets, and accordingly, recorded these instruments at their fair value with the net unrealized gains and losses, net of the applicable deferred income tax effect, being added to or deducted from our Total stockholders' equity in our Condensed Consolidated Balance Sheets. As ofSeptember 30, 2021 , we had a total of$300.0 million of borrowings under our term loan that are subject to floating interest rates. The interest on these borrowings is calculated using a selected LIBOR rate plus an interest rate margin of 125 basis points. Borrowings under our commercial paper program mature in such a short period that the 53
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the financing is also effectively variable rate. From
We review our overall exposure to floating and fixed rates by evaluating our net asset or liability position and the duration of each individual position. 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). From time to time, we use interest rate swaps designated as hedges to vary the percentage of fixed to floating rate debt, subject to market conditions. As ofSeptember 30, 2021 , our weighted-average effective rate on total borrowings was approximately 3.4%. For further detail on our variable rate borrowings, see risk factor "We have substantial debt and other obligations that could restrict our operations" in Part I, Item 1A, Risk Factors in our Annual Report on Form 10-K for the year endedDecember 31, 2020 . AtSeptember 30, 2021 , a hypothetical 100 basis point increase/decrease in interest rates would result in a decrease/increase to pre-tax income for the next twelve months of approximately$4 million based on borrowings that are sensitive to interest rate fluctuations, net of the impact of hedges. The same 100 basis point increase/decrease in interest rates, if applied to our cash and investment balances onSeptember 30, 2021 that bear interest at floating rates, would result in an offsetting increase/decrease to pre-tax income for the next twelve months of approximately$17 million . There are inherent limitations in the sensitivity analysis presented, primarily due to the assumptions that interest rate changes would be instantaneous and consistent across all geographies in which our interest-bearing assets are held and our liabilities are payable. As a result, the analysis is unable to reflect the potential effects of more complex market changes, including changes in credit risk regarding our investments, which may positively or negatively affect income. In addition, the mix of fixed versus floating rate debt and investments and the level of assets and liabilities will change over time, including the impact from commercial paper borrowings that may be outstanding in future periods.
Credit risk
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. We are also exposed to credit risk related to receivable balances from agents in the money transfer, walk-in bill payment, and money order settlement process. We perform a credit review before each agent signing and conduct periodic analyses of agents and certain other parties we transact with directly. In addition, we are exposed to losses directly from consumer transactions, particularly through our digital channels, where transactions are originated through means other than cash and are therefore subject to "chargebacks," insufficient funds or other collection impediments, such as fraud, which are anticipated to increase as digital channels become a greater proportion of our money transfer business. We are exposed to credit risk in our Business Solutions business relating to: (i) derivatives written by us, primarily to our customers, and (ii) 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 extended trade credit, collection ordinarily occurs within a few days. To mitigate the risk associated with potential customer defaults, we perform credit reviews of the customer on an ongoing basis, and, for our derivatives, we may require certain customers to post or increase collateral.
Our losses represented approximately 2% or less of our consolidated revenues for all periods presented.
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