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While it might sound like an altruistic mission, industry insiders say offering financial services to people shut out of the mainstream is actually a hot business opportunity.
“We have proven very, very clearly that there is a great market available,” Julian King, the vice-president of PayPal’s remittance business Xoom, told Yahoo Finance UK. “That’s pretty much why it’s red hot right now.”
A $529bn market
Remittances — money sent overseas to family and friends — is one of the core financial services used by the so-called “under banked” or “unbanked” population, terms used to describe people who don’t have access to bank accounts or only limited financial services.
These type of payments form the backbone of many developing economies. The market was traditionally dominated by Western Union and a few other players. Large banks viewed remittances as an unprofitable and risky backwater.
But the remittance market is increasingly seen as a great business opportunity. Global remittances grew by 9.8% in 2018 — well above GDP — to reach an all-time high of $529bn, according to the World Bank. That rate of growth is forecast to continue for the next few years as the world becomes more global.
“Remittance flows are a very, very important part of the global economy,” King said. “Over a quarter billion people in the world are now living outside of their country of origin, over time I would imagine that those numbers will grow.”
The market is still predominantly cash-based but digital payments are a fast-growing segment. That creates a great opportunity for a digital-first business like Facebook to tap the market.
Remittance is one of two products called out in the Libra white paper as use cases, alongside payday loans. For Facebook, the market offers the chance to both do some good in the world and make a lot of money.
‘Facebook wants to be part of the food chain’
Others have already cottoned on to this opportunity. Xoom is one of a number of new, digital-first remittance businesses set up in the last few years. The company was founded in 2001 and went public before PayPal bought the business for $890m in 2015.
Others startups in the sector include TransferWise, which is now one of Europe’s most valuable private tech businesses, and TransferGo.
“These people are already digitally savvy but they are under-served by traditional players for various reasons — lack of trust, lack of innovation on the traditional side, lack of focus because traditionally under-served retail has not been the focus of major retail banks,” TransferGo founder and CEO Daumantas Dvilinskas told Yahoo Finance UK.
“The market is so big and the gap is fairly wide and therefore people are obviously looking at ways to address it.”
Dvilinskas said he thinks Libra is Facebook’s way to drive new revenue from its user base at a time when its core model of data-driven advertising is under fire around the world.
“My interpretation is that they need to find new, innovative ways to leverage their user base,” he said. “Facebook wants to be part of the food chain and they’re trying to find where they could fit.”
Most of Facebook’s user growth is coming from India, Indonesia, and the Philippines, according to the company’s latest annual report, but average revenue per user in the Asia-Pacific region is 10 times lower than in the US and Canada. Introducing new services like remittances that are more tailored to these fast-growing markets would make a lot of sense.
Smartphone cuts costs
Part of the reason remittances is now an attractive market is down to the growth of the smartphone. The super computer in people’s pockets has pushed down the cost of delivery and unlocked financial services in markets that used to be difficult to serve.
“Banks and payment processors, they’re profit seeking companies,” Ripple CEO Brad Garlinghouse told Yahoo Finance UK. “It’s not that they don’t want to serve [this market], it’s that they can’t serve them profitably. If I can lower their costs and enable them to serve the market profitably, they’re going to want to work with them.”
Examples of successful new financial services that have been built on top of the smartphone include the mPesa mobile wallets in Kenya and Alipay in China.
Businesses like these have managed to bring down costs of serving developing market customers without using cryptocurrency. But Ripple is an example of a company using the tech. It uses the XRP (XRP-USD) token to cut down on the cost and increase the speed of moving money. Ripple recently bought a 10% stake in MoneyGram for $30m as part of efforts to take cryptocurrency remittances mainstream.
“When MoneyGram wants to open a new corridor, they have to pre-fund an account,” Garlinghouse told Yahoo Finance UK. “That’s working capital. If you’re a small, new remittance company going from the UK to the Philippines, do you want to park $1m in the Philippines? You don’t want to do that. What Ripple enables is real time transactions so you don’t have to do that pre-funding.”
Libra could do something similar and hopes to go beyond just remittances. Part of the reason Facebook seems to have favoured a cryptocurrency solution is because of its theoretical versatility. Libra will function not just as a currency but as a platform — people could build services on top of Libra allowing them to do everything from insurance to loans.
‘It’s not a technological problem’
However, Dvilinskas said Facebook may be overestimating the power of technology in finance.
“On its own, blockchain doesn't really address this problem because it’s not really a technological problem, it’s more of a regulatory problem,” the TransferGo CEO said. “Even after the announcement many national banks came out and said we should take a look at this.”
Politicians in the US have called on Facebook to immediately stop the development of Libra until they can properly regulate it. The G7 nations have also set up an emergency committee to monitor the project and central banks around the world have warned that Libra could pose risks to financial stability, monetary policy transmission, and money laundering.
All of this has thrown doubt on whether the project will ever get off the ground, let alone launch in 2020 as first announced.
Regardless, those in the space believe Facebook’s foray will help improve the services offered to the unbanked and under-banked.
“Any announcement from Facebook is news because of the potential they have to disrupt multiple industries,” Dvilinskas said.
Responding to Libra, Bank of England governor Mark Carney said the project “serves the purpose of raising the bar of expectations about what our citizens deserve.”
“It’s about darn time that the underserved found themselves the focus of innovation around the world,” Xoom vice-president King said. “I’m really proud to be part of that movement.”
Oscar Williams-Grut covers banking, fintech, and finance for Yahoo Finance UK. Follow him on Twitter at @OscarWGrut.