Ultimately, this is what is going to keep Bitcoin from being the "money" of the Internet. They do not have the ability to scale up to millions of transactions per second. You are right to point out how they become nothing more than a Western Union because the fees rival that of the one time money transfer agent.
Overall, I think BTC will be huge because of the name and the fact there is a lot being developed on it. Wall Street will buy BTC in droves. However, unless something radical is done, it will not be the king of online transactions. Something else will fill that void.