Who would want to use Facebook as a bank? That's the question that immediately arises from news that the social network intends to get into the electronic money business.
According to the Financial Times, Facebook is close to receiving authorization from Ireland's central bank to become an "electronic money institution." The status would allow it to process transfers and payments throughout Europe, where the market for non-bank financial services appears to be heating up with big new entrants such as Vodafone. The customers Facebook is targeting, though, might be as much in developing nations as in Europe.
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The developed world, and Europe in particular, is far from the best place to break into banking. Most people are already perfectly capable of sending money to each other in various ways. According to the World Bank, the share of adults with bank accounts ranges from 98 percent in Germany to 45 percent in Romania, and financial inclusion rates in Europe will inevitably converge. Google has had an e-money license in the U.K. for almost three years, but its Google Wallet service appears to be bringing in little revenue. Full functionality, including personal transfers, is available only in the U.S., where 88 percent of people have bank accounts.
Facebook, however, may be taking aim at a different demographic: Migrants who work in the developed world and send money home to the developing world. This is an area ripe for disruption. The companies, some bank-affiliated and some independent, that now dominate the market tend to charge a lot for their services and mostly aren't much fun to use. Last year, they channeled a total of $404 billion in remittances, a number that the World Bank predicts will expand to $436 billion. The most expensive "corridor" runs from South Africa to Zambia: It costs $21 to send $200, according to the World Bank. The biggest recipient country is India, whose residents received $71 billion last year.
Facebook has about 100 million users in India. One can send the euro equivalent of $200 from Germany to India for $1 in a matter of days using a London startup called TransferWise, set up by Skype's first employee Taavet Hinrikus and another Estonian, Kristo Kaarmann. Facebook might be able to improve on that by guaranteeing instantaneous transfers, and perhaps by offering lower prices, because it is so huge. Facebook is reportedly talking to TransferWise and its peers about some kind of partnership.
A European e-money license is only one piece of the puzzle Facebook needs to assemble if it is to muscle into the migrant remittance market. It would need to secure regulatory approval and set up or acquire an infrastructure in India and other large developing countries. The important part is making it easy for people to withdraw cash. Vodafone's e-money operation, M-Pesa, solved this in Kenya by setting up a nationwide network of agents who pocket most of the commission the service earns. Facebook has ample motivation to try something similar: If it made a quarter of a cent on each dollar transferred to India by migrant workers, it would have a $177 million revenue stream.
If companies such as Facebook and Google build up experience serving the unbanked in the developing world, they could someday challenge retail banks in rich countries. For the time being, getting involved in the remittance industry could be an interesting way to monetize user bases that are not particularly valued by advertisers.