The National - Why Facebook is piloting a fee-free money transfer service

Arun Leslie John, Special to The National October 21, 2021

Mark Zuckerberg's Facebook is piloting a fee-free money transfer service through its Novi digital wallet that allows users in the US and Guatemala to send money to each other, marking the technology company’s first foray into the multibillion-dollar global remittance market.

The pilot will allow people to send and receive money across borders instantly and securely with no fees, Novi says in a statement on its website.

“We are doing a pilot to test core feature functions and show our operational capabilities in customer care and compliance can serve people well,” it says. “We are also hopeful this will demonstrate a new stablecoin use case as a payments instrument beyond how they are typically used today.”

In October, the World Bank said remittances would fall 14 per cent by the end of 2021, compared with pre-coronavirus levels in 2019. The Washington-based lender projected that global remittances would decline 7 per cent to $508 billion in 2020 and 7.5 per cent to $470bn in 2021.

The value of the mobile wallet industry is forecast to grow 24 per cent this year to $2.4 trillion, according to a report by finance and investment company Finaria. The growth trajectory is expected to continue, with the market estimated to reach $3.5tn by 2023, according to the report.

Meanwhile, global cross-border payments are growing at an annual rate of about 5 per cent and are expected to reach $156tn by next year, a report by London-based consultancy Ernst & Young showed.

"Facebook already has a rich customer base of more than 2.8 billion users on its social media platform. This approximately equates to more than 30 per cent of the global world population," says Arun John, chief market analyst with Dubai-based Century Financial.

"By entering this space, the company is likely to give tough competition to other well-established players in the digital space, including PayPal, Visa and even certain remittance-specific cryptocurrencies such as Ripple over the longer term."

The pilot was first announced on Twitter by David Marcus, the head of Facebook Financial, who oversees the technology company’s payments and financial services products and experiences, which include Facebook Pay, Novi and its cryptocurrency project Diem.

"We have an opportunity to help change the game for so many people who have been left behind by the current financial system. I believe we should take that opportunity and I am eager for us to start the journey," Mr Marcus said in a series of tweets on Tuesday.

Facebook’s remittance pilot enables users to send and receive money using Pax Dollars, or USDP, through a partnership with blockchain infrastructure platform Paxos and Coinbase, the largest cryptocurrency exchange in the US.

Mr Marcus, who was the president of online payment platform PayPal from 2012 to 2014, is a former board member of Coinbase but stepped down from the role in 2018 to "avoid the appearance of a conflict of interest" with his work at Facebook, Coinbase said on its website at the time.

When contacted for further comment about the company's future plans for a global unveiling of its money transfer system, including in the UAE, a Novi representative said: "Regarding future plans or roll-out in other countries, the pilot is just limited to the US and Guatemala at this time and we don’t have anything further to share on plans in other countries."

Under the Novi pilot, one USDP is equal to $1 and recipients can withdraw the money in their local currency.

“They can keep the money in their Novi balance or withdraw it by picking up cash at a nearby location or transferring it to their bank account. These options vary by country,” Novi says.

The success of the US-Guatemala pilot is crucial for Facebook's Diem cryptocurrency project as it aims to migrate Novi to the Diem payment network once it receives regulatory approval.

Facebook unveiled its cryptocurrency project in 2019. Originally called Libra, it changed the name to Diem, which means "day" in Latin, in December 2020.

However, it has faced numerous delays and regulatory hurdles after receiving a frosty reception from politicians, particularly in the US where Facebook's record on data privacy has been heavily criticised.

US regulators say it could potentially enable money laundering, terrorist financing and anticompetitive activity, and lead to "new, coercive forms" of debt collection if a social media company ventures into finance.

In May last year, the technology company also rebranded its Calibra digital wallet, which is designed to store cryptocurrency, as Novi.

"Our support for Diem has not changed, We see great value in the way Diem is designed, with robust protections for consumers and controls to combat financial crime," Novi says.

"The goal for Novi has always been and always will be to be interoperable with other digital wallets and we believe a purpose-built blockchain for payments, like Diem, is critical to deliver solutions to the problems that people experience with the current payment system."

It is likely that the company is testing the waters and waiting to see how US regulators respond to ongoing developments in the cryptocurrency space, according to Mr John.

"It would be interesting to see how Diem competes with well-established stablecoins in this space like Tether and USDC," he says.

Facebook is not the first technology company to enter the multibillion-dollar remittance industry.

In May this year, mobile wallet platform Google Pay tied up with money transfer companies Wise and Western Union to allow its US-based users to remit money to India and Singapore.

The service integrates the platforms of London-based Wise and Western Union, the world’s largest money transfer service, into the Google Pay app, the company said at the time.

Google, which was the first major company to introduce an e-wallet in 2011, is one of many technology companies pushing deeper into the financial world. In 2019, Apple launched a credit card in partnership with Goldman Sachs.

"Smaller operators in this space should be well aware of these tech giants’ monopolistic powers," Mr John says.

"From Apple to Google, most US tech giants have an advantage that no other company possesses – that of economies of scale. From investments to research to their massive customer base, these tech platforms possess the capabilities and resources to absorb and acquire any upcoming small-to-medium size competitors."

Although the Facebook platform does not pose any imminent threat to the global remittance network since its pilot is primarily focused on the US, if the project turns out to be a success, the company is expected to apply for remittance-based regulatory approvals for other countries, too, Mr John says.

"FinTech companies [are] revolutionising the remittance industry in the best interest of consumers," says Rajiv Raipancholia, chief executive of Orient Exchange.

"The need for convenience, easy access and speed is driving the success of digital remittances. However, there is still growth in the brick-and-mortar model for remittances but digital technology such as wallets and mobile apps is growing at a faster pace."

Globally, about 1.7 billion adults do not have access to a bank account, according to the Global Findex Database 2017, which publishes a comprehensive data set every three years on how adults save, borrow, make payments and manage risk.

The Facebook Novi pilot is aiming to help solve the problem of financial inclusion, it says.

“Being shut out of the global financial system has real consequences for people’s lives and it is often the most underserved people who pay the highest price,” Novi says.

“Costs are high and waits are long when people want to send money to their families internationally. The current system is failing them and there is no digital financial architecture to support the innovation we need.

“These are the challenges we hope to solve in time with Novi … whether someone is sending money from the US to a loved one in Guatemala or paying back a friend nearby, it is as easy as sending a message.”

However, Facebook's remittance pilot should be regarded as the company leveraging its existing client base rather than providing access to the unbanked population, says Mr John.

Meanwhile, Novi has moved to allay customers' fears about privacy and its association with Facebook, saying in a separate statement that it has "strict controls in place to limit what is shared with other Facebook companies".

Novi accounts are separate from Facebook accounts and a user's money transfer activity is not posted to their Facebook profile, the company says.

"From day one, we are making it our priority to provide you with simple, understandable and accessible explanations of when and how we collect, use and share your information, as well as the choices and controls you have," it says.

"During this pilot and beyond, our goal is to provide you with an app that is secure, easy to use and compliant with applicable laws.

"Novi will only share information with other Facebook companies to help us keep Novi safe for everyone, comply with the law, provide basic functionality and allow us to advertise Novi services. Even in these cases, Novi does not share your financial information with Facebook for Facebook's own advertising purposes."