MoneyGram’s Decision to Halt Ripple Partnership Leaves CFO With Earnings Hole

MoneyGram’s Decision to Halt Ripple Partnership Leaves CFO With Earnings Hole

Money-transfer company earned fees for using Ripple’s digital currency platform

MoneyGram International Inc.’s decision to pause its partnership with digital-currency startup Ripple Labs Inc. cuts off a key income stream and, for now, leaves its finance chief with no clear options to replace it.

MoneyGram, a Dallas-based money-transfer company, this week said it suspended its partnership with Ripple in December after securities regulators sued Ripple for violating investor protection laws. MoneyGram was using Ripple’s digital currency, XRP, and a platform for XRP transfers as an alternative source of foreign exchange as part of an agreement signed in 2019.

MoneyGram, which used the platform in its back office to fund cross-border transfers, said it reduced foreign exchange risk by offering almost real-time settlements using Ripple’s technology. Before the lawsuit, the company had said it expected the partnership to reduce working capital needs and generate additional revenue and cash flow.

It also bolstered MoneyGram’s bottom line. Ripple paid MoneyGram for using its platform, providing financial incentives for helping the startup expand to new markets. Last year, MoneyGram received $38 million in net market development fees from Ripple, representing about 15% of the company’s adjusted earnings before interest, taxes, depreciation and amortization. But after the lawsuit was filed, the company said it faced logistical challenges in using the platform as well as legal and reputational risks.

The loss of the fees, along with a decline in investment revenue because of lower interest rates, is forecast to weigh on MoneyGram’s first-quarter results, the company said Monday. MoneyGram expects adjusted Ebitda to decline 3% during the quarter to about $50 million, compared with the prior-year period. Net income during the quarter ended Dec. 31 was $7.3 million, compared with an $11.9 million loss a year earlier.

MoneyGram is working with Ripple to figure out possible alternatives, according to Chief Financial Officer Larry Angelilli. The agreement between the two companies expires in 2023. Ripple also agreed to invest up to $50 million in MoneyGram.

“If there’s a resolution to the case, especially if Ripple prevails, then I would say there would be no problem,” Mr. Angelilli said. “But that could be a long time.”

Resolving the case—viewed as a key test of the Securities and Exchange Commission’s approach to regulating cryptocurrencies—could take years, said Prat Vallabhaneni, a partner in the financial services regulatory practice at law firm White & Case LLP. “It just depends because there is a lot of steps to the trial process, and there is always the possibility for appeals,” Mr. Vallabhaneni said.

Ripple said in a statement it wants to find a path forward with MoneyGram, adding that it has confidence lawsuit will provide more clarity on the regulatory treatment of blockchain technology and digital assets in the U.S.

Cryptocurrencies have attracted scrutiny in recent weeks following Tesla Inc.’s $1.5 billion investment in bitcoin, which caused the price of bitcoin to surge. Other finance chiefs so far have held off, citing volatility in the price of most digital assets and restrictions in their corporate investment policies.

Before pausing the partnership, according to Mr. Angelilli, MoneyGram used Ripple’s platform as one of several for converting dollars into four foreign currencies: Mexican pesos, Philippine pesos, Australian dollars and euros. Transactions worked like this: MoneyGram would buy XRP on U.S. cryptocurrency exchanges using U.S. dollars. The XRP would then move on the blockchain to an exchange in another country, where it would be converted into the local currency and deposited in the company’s accounts.

U.S. cryptocurrency exchanges stopped trading XRP after the SEC sued Ripple, as well as Chief Executive Brad Garlinghouse and founder Chris Larsen, for engaging in an illegal securities offering, according to Mr. Angelilli.

It is unclear what MoneyGram’s other options are under the Ripple partnership, Mr. Angelilli said, adding that there are no other comparable solutions to facilitate cross-border transactions in real time. In a securities filing, MoneyGram said it might not resume trading with Ripple. Mr. Angelilli said MoneyGram continues to view cryptocurrency and the blockchain as important to its future.

The partnership is essentially a marketing agreement, said David Scharf, an analyst at JMP Securities, an investment banking firm. The startup paid MoneyGram to receive the backing of a global consumer brand as it was trying to expand, Mr. Scharf said. MoneyGram, in return, received a new income stream that boosted its earnings, but took no financial risk, he said.

MoneyGram’s stock plunged 28%, to $7.77, after the company released quarterly results Monday morning, and closed the day down 23%, to $8.38. Its shares closed Thursday at $6.84.

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