The Financial Times was the first to report this week that Facebook is set to launch a financial service that will enable users to store money, make payments and exchange funds with others through its social network. The company will soon receive regulatory approval from Ireland’s central bank to become an “e-money” institution, according to the FT piece, allowing it to issue and store money in the form of digital credits.
Facebook has declined to comment, but a key piece of the company’s plan reportedly is remittances — money transfers from foreign workers to people in their home country. The global remittance flow surpassed $500 billion in 2012, according to the World Bank, and is expected to grow in emerging markets for at least the next few years. And as the FT piece notes, India is Facebook’s largest national market outside the U.S., with 100 million users. India is also is the world’s largest remittance recipient, with residents receiving $69 billion in such transactions in 2012.
Looking far beyond proximity mobile payments
Mobile has quickly grown to account for the largest portion of Facebook’s traffic and ad revenues, and the company has reportedly already discussed partnerships with at least three U.K.-based startups that provide international money transfers via smartphones and PCs. It makes sense, then, that that the tech press is already comparing Facebook to mobile payments services offered by PayPal, Google and others.
Rather than following those behemoths, though, it looks like Facebook may be taking a page from the playbook of M-Pesa, a 7-year-old mobile payment and microfinancing service that is revolutionizing banking in some emerging markets. Described as “the most developed mobile payment system in the world,” M-Pesa launched in Kenya, where it claims 17 million users, and has since spread to Afghanistan, India, South Africa and Tanzinia. The service is primarily based on SMS rather than smartphone apps, and it is targeted at the “unbanked” – consumers and small vendors who lack formal bank accounts and therefore don’t have easy access to cash.
As Gigaom’s David Meyer reported a few weeks ago, M-Pesa has expanded into Europe for the first time with a launch in Romania through Vodafone, which indirectly owns part of the service. M-Pesa users in Romania can send more than $9,000 per day with their phones, and Vodafone hopes to enable the remittances for Romanian users that have driven M-Pesa’s success in other markets.
WhatsApp could play a crucial role
TechCrunch pointed out that Facebook’s $16 billion acquisition of WhatsApp could be a key piece of the social network’s big move into online payments. WhatsApp not only has a massive base of consumers who use the service to communicate with friends internationally, it has a strong presence in some emerging markets where Facebook has yet to gain substantial ground. Bringing banking services to those users could help Facebook monetize its massive investment with minimal risk.
Business Insider (among others) rightly noted that this wouldn’t be Facebook’s first foray into digital payments – the company has had several failures, in fact, and it continues to take a slice of purchases made inside apps that run on its platform. And InformationWeek cites a recent study from Ovum that indicates consumers are far less likely to trust social networks to handle mobile payments than they are to trust banks or credit card companies.
Mobile wallet initiatives such as Google Wallet and Isis have failed to catch on in North America largely because they have failed to bring any added value to the market. But M-Pesa’s success proves that there’s still a need for online banking systems that helps unbanked consumers in emerging markets create accounts and send and receive funds internationally at affordable rates. While some of the biggest companies in the U.S. continue to crack open the market for the mobile wallet, Facebook is wise to take a more global view.