Facebook's Novi Creates New Remittance Challenges
Last week, Facebook (FB) +1.6 percent announced the launch of Novi, a blockchain-based platform designed to compete in the remittances space.
Novi, which is currently in beta testing, will initially allow users to send money from the United States to Guatemala using the stablecoin digital currency Pax Dollar, which
they can store in a digital wallet and convert into local currency. Facebook eventually intends to use its own cryptocurrency Diem for the service, but this will not be possible until it receives approval from US regulators.
While the initial pilot restricts Novi to this one corridor, it is expected that the company will expand to other corridors – and some investors are already concerned about the impact it will have on more established players in the remittances space.
Novi from Facebook: How does the pilot compare to remittance competitors?
The share prices of Novi's main publicly traded competitors, Remitly, Western Union WU +1.4 percent, and MoneyGram MGI +1 percent, all fell on news of the pilot's launch, with the mobile-first Remitly suffering the greatest drop. However, the initial pilot has significant limitations, and there are still questions about the final version of Novi's remittance offering.
The use of the Pax Dollar for the pilot severely limits the number of users who can either hold the digital currency or conduct transactions with it on any given day, with a total number of 200,000. As a result, Facebook has already established a waitlist for Novi and imposed a number of restrictions, including a $300 transaction cap, a $1,000 daily send limit, and a $2,500 daily maximum on adding or withdrawing funds from each account.
At the moment, Novi is offering its remittance service without any fees or FX margin, as would be expected in a pilot and similar to many other money transfer service launch strategies. However, the fact that a service is provided for free does not guarantee its success. While Revolut is a great example of a company that grew its user base by offering free FX, Santander subsidiary PagoFX tried the same and was unable to gain enough traction in the market.
While there is some market concern that Facebook's free model is a long-term strategy, the company's own language indicates that this is most likely a temporary situation. The company's website specifically states that it is free "today," and job postings for the company describe it as planning to provide a "low to no cost" service.
How the market reacted to Facebook’s Novi announcement
Share price changes for key remittance companies on October 19.
The future of Novi: Pricing pressure and beyond
However, there are obvious concerns that the low-cost remittances strategy that Facebook appears to be pursuing with Novi will result in increased pricing pressure for the industry, as consumers increasingly expect lower prices when sending money abroad.
However, during the company's recent Q3 2021 earnings call, Ria owner Euronet's CEO Michael Brown dismissed such concerns, saying that while remittances "is a dog-eat-dog business," the company hasn't "really felt much pricing pressure."
"I don't think it's accurate to say we're suddenly under the gun on pricing," he said.
Facebook takes on remittances: Novi’s offering
Novi’s pilot remittance offering versus final version
Long-term plans beyond remittances
In the long run, it appears that Facebook intends to use Novi for applications other than remittances, as stated in job postings: "Over time, Novi will support additional use cases such as commerce transactions and support other financial services."
This indicates a desire to position the digital wallet as a rival to the super-app PayPal, rather than simply competing in the core remittances space. To get to this point, Novi must be available in its final form – that is, running on the Diem blockchain and cryptocurrency rather than the current Pax Dollar stablecoin.
The launch of the Novi pilot indicates that Facebook is optimistic that Diem will be approved by regulators soon, though it is not without critics. For example, the pilot prompted a group of Senate Democrats, including Brian Schatz and Elizabeth Warren, to write an open letter to Facebook CEO Mark Zuckerberg, expressing concerns about the pilot's "aggressive timeline" and arguing that Novi was "incompatible with the actual financial regulatory landscape" and posed risks to the financial stability of the United States.
Overall, Facebook has the user base, product, and strategic capability to execute and capture market share in remittances. What is much more difficult to predict are the political and regulatory headwinds that Facebook may continue to face, some of which are unique to Facebook and some of which are industry-wide. Furthermore, there are difficult questions surrounding whether US dollar stablecoins should be treated the same as fiat US dollar, not just in the US, but in every overseas market Novi enters.
Source: Forbes.