What's missing from Facebook's digital payments plan
Facebook’s arrival on the digital payment scene will inevitably see it become a significant player. But, so far, Facebook is not offering a revolution in the global payment infrastructure and tie-ups with disruptive new technologies would truly transform the FX landscape.
When Facebook announced its plans to introduce payment functionality within its messenger service, the world sat up and took notice.
The huge number of loyal users on its network puts it in a very strong position in any business it turns its attention to, and payments looks a natural fit.
Ripple is not a competitor to Facebook but rather a better alternative payments infrastructure
Offering existing customers basic financial services such as payments is a proven business model that can be traced back to the genesis of PayPal – an apt comparison, given Facebook messenger is run by the former CEO of PayPal, David Marcus.
Other social messaging platforms have made similar moves. Line and Snapchat, for example, have made inroads in this crowded space. Venmo, which operates in the US and is owned by PayPal, is seen as a potential game-changer, marrying payments with the social-media ethos in a way that is clearly relevant among young users.
Facebook has a cross-generational appeal that few other providers can match. When it goes live, with the US set to be first to see this feature, and other locations set to be added in due course, it is likely to encourage people to make digital payments who have never done so before.
Zilvinas Bareisis, analyst at Celent, says: “Facebook is about exchanging messages, exchanging videos and photographs – exchanging money is a natural extension of that so I’m not surprised they have made this move. If anything, I’m surprised they didn’t do it sooner.”
Yet, while Facebook has name recognition and a massive existing user-base working in its favour, it does not appear to be competing much on innovation on the technology side.
Facebook’s announcement gave no indication it has any ground-breaking vision about how payments should be executed.
To materially transform the payment business, it should consider turning its back on existing financial infrastructures and use Ripple, says Patrick Griffin, head of business development at Ripple Labs, the developer of the Ripple protocol.
It challenges the existing correspondent banking approach to cross-currency payments, using straight-through processing for real-time settlement of monies without having to pre-fund an account.
“Ultimately, if Facebook became a gateway on the Ripple system it could use that infrastructure to provide cross-currency payments in the same way Earthport [a clearing and settlement system that focuses on high-volume, low-value payments between financial institutions] is,” says Griffin.
“Ripple is not a competitor to Facebook but rather a better alternative payments infrastructure. With Ripple, the actual movement of cash would better mirror the Facebook user experience – instant settlement of money across borders and currencies so that it shows up in the destination account instantly alongside the messaging notification.”
For now, Facebook looks set to offer dollar-to-dollar payments, with euro-to-euro or sterling-to-sterling payments coming at a later date.
Making international or cross-currency payments is more complicated and puts you in a different regulatory domain
Zilvinas Bareisis, Celent
While this could be a convenient option for many, it is not a revolution in payments such as what is envisaged by Monetas, for example, which seeks to transform the remittances market by offering the ability to make cross-currency payments quickly, securely and at low cost, both in fiat and cryptocurrencies.
Johann Gevers, CEO at Monetas, another innovative peer-to-peer payments platform, says: “We are focused on developing systems and tools that give ultimate control to the user. With conventional systems, users are at the mercy of powerful third parties, which can and often do abuse that power. By contrast, our users will have full control over their own assets and information.”
Pushing the boundaries of what is possible, or offering existing services in radically new or cheaper ways, is patently not what Facebook is offering here, but a tie-up with Ripple would change all that, says Griffin.
He elaborates: “Facebook Messenger payments is a smart business move and an innovative user-experience for billions of potential users, but it will rely on a non-innovative and extremely fragmented payments network to settle transactions.
“Like other experiences using legacy networks, users will have to wait multiple days before cash actually shows up in an account or possibly even incur costs for transactions involving multiple currencies.”
Chris Larsen, co-founder and CEO of Ripple Labs, adds: “Traditional cross-border payments are inefficient today because both the technology and compliance frameworks underpinning them were built country by country decades ago.”
Griffin believes Ripple is well placed to facilitate Facebook’s transition into the cross-currency payment space, after its announcement in December it had entered a partnership with Earthport to offer real-time cross-border bank payments.
That deal saw Earthport integrate the Ripple protocol alongside its payments network to minimize the need for cross-border transactions to be pre-funded.
Since then, Ripple has also beefed up its presence in Asia as demand for its services grows across the region: according to McKinsey, in 2013, cross-border payments in Asia Pacific totalled $200 billion, accounting for nearly half of all payment revenues in the region.
The question is whether Facebook is interested in using its undeniable clout as a ubiquitous social-media platform to dominate the potentially lucrative remittances and cross-border payments market, which has been blown wide open by innovations such as Bitcoin.
Celent’s Bareisis says: “Making international or cross-currency payments is more complicated and puts you in a completely different regulatory domain where you have to think about AML and the possibility of financing terrorism.
“So it isn’t surprising it would start with national payments first. There are big challenges to moving into cross-currency payments, but if it did it would be a very powerful player.”
Remittances are already dominated by non-banks such as Western Union and TransferWise, but Facebook’s scale increases the potential for regulatory scrutiny.
On the other hand, its move into payments could be a Trojan horse for other ambitions.
Bareisis notes: “If Facebook convinces its users to link to a bank account, it could potentially add a buy button to the adverts on the site which could be an interesting proposition for advertisers.”
It might therefore be that Facebook’s foray into payments is less about transforming the digital payment space than increasing its commercial offering to potential advertisers.
However, even without being transformational, perhaps it is a mistake to assume the big winner in payments will be the player with the most compelling technological offering.
“Of course, Facebook competes with the likes of PayPal or Venmo, but the big competitor is also simply cash,” says Bareisis.
“Encouraging people to use the new services instead of cash sometimes is less about technology and more about other factors. If the providers can crack that, there is plenty of room for all of them to grow.”
Facebook declined to comment.