Why Facebook is piloting a fee-free money transfer service

Facebook, led by Mark Zuckerberg, is testing a fee-free money transfer service via its Novi digital wallet, allowing users in the United States and Guatemala to send money to one another, marking the technology company's first foray into the multibillion-dollar global remittance market.

According to a statement on Novi's website, the pilot will allow people to send and receive money across borders instantly and securely, with no fees.

"We are conducting a pilot to test core feature functions and demonstrate our operational capabilities in customer care and compliance can serve people well," the company says. “We also hope that this will demonstrate a new stablecoin use case as a payment instrument that goes beyond how they are currently used.”

The World Bank predicted in October that remittances would fall 14% by the end of 2021, compared to pre-coronavirus levels in 2019. According to the Washington-based lender, global remittances will fall 7% to $508 billion in 2020 and 7.5% to $470 billion in 2021.

According to a report by finance and investment firm Finaria, the value of the mobile wallet industry is expected to increase by 24% this year to $2.4 trillion. According to the report, the market's growth trajectory is expected to continue, with the market expected to reach $3.5tn by 2023.

Meanwhile, global cross-border payments are growing at a 5% annual rate and are expected to reach $156 trillion by next year, according to a report by the London-based consultancy Ernst & Young.

"On its social media platform, Facebook already has a sizable customer base of more than 2.8 billion users." "This equates to roughly more than 30% of the global world population," says Arun John, chief market analyst at Dubai-based Century Financial.

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

David Marcus, the head of Facebook Financial, who oversees the technology company's payments and financial services products and experiences, including Facebook Pay, Novi, and its cryptocurrency project Diem, first announced the pilot on Twitter.

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

Through a collaboration with blockchain infrastructure platform Paxos and Coinbase, the largest cryptocurrency exchange in the US, Facebook's remittance pilot allows users to send and receive money using Pax Dollars, or USDP.

Mr Marcus, who served as the president of online payment platform PayPal from 2012 to 2014, is a former Coinbase board member who stepped down in 2018 to "avoid the appearance of a conflict of interest" with his work at Facebook, according to Coinbase's website at the time.

When asked for more information about the company's 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."

One USDP is equal to one dollar in the Novi pilot, and recipients can withdraw the funds in their local currency.

"They can keep the funds in their Novi balance or withdraw them by picking up cash at a nearby location or transferring them to their bank account." "These options differ by country," Novi explains.

The success of the US-Guatemala pilot is critical for Facebook's Diem cryptocurrency project, which intends to migrate Novi to the Diem payment network once regulatory approval is received.

In 2019, Facebook revealed its cryptocurrency project. In December 2020, it changed its name from Libra to Diem, which means "day" in Latin.

However, it has faced numerous delays and regulatory hurdles following a cold reception from politicians, particularly in the United States, where Facebook's record on data privacy has been heavily criticized.

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

In May of last year, the technology firm rebranded its Calibra digital wallet, which is used to store cryptocurrency, as Novi.

"Our support for Diem remains unwavering. We see great value in the way Diem is designed, with robust consumer protections and controls to combat financial crime," Novi says.

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

According to Mr. John, the company is most likely testing the waters and waiting to see how US regulators react to ongoing developments in the cryptocurrency space.

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

Facebook isn't the first technology company to enter the multibillion-dollar remittance market.

Google Pay partnered with money transfer companies Wise and Western Union in May of this year to allow its US-based users to send money to India and Singapore.

According to the company, the service integrates the platforms of London-based Wise and Western Union, the world's largest money transfer service, into the Google Pay app.

Google, which was the first major company to launch an e-wallet in 2011, is one of many technology companies expanding their financial offerings. In 2019, Apple collaborated with Goldman Sachs to launch a credit card.

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

"From Apple to Google, the majority of US tech behemoths enjoy a competitive advantage that no other company can match: economies of scale. From investments to research to their massive customer base, these technology platforms have the capabilities and resources to absorb and acquire any upcoming small-to-medium-sized competitors."

Although the Facebook platform does not pose an immediate threat to the global remittance network because its pilot is primarily focused on the United States, if the project proves successful, the company is expected to apply for remittance-based regulatory approvals in other countries as well, according to Mr John.

"FinTech companies [are] revolutionizing the remittance industry in the best interests of consumers," says Orient Exchange CEO Rajiv Raipancholia.

"The desire for convenience, ease of access, and speed is propelling the success of digital remittances."

"When people want to send money to their families around the world, the costs are high and the wait times are long." The current system is failing them, and there is no digital financial architecture in place to support the necessary innovation." These are the challenges we hope to overcome with Novi over time... It is as simple as sending a message to send money from the United States to a loved one in Guatemala or to repay a friend nearby."

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

Meanwhile, Novi has taken steps to assuage customers' concerns about privacy and its relationship with Facebook, stating in a separate statement that it has "strict controls in place to limit what is shared with other Facebook companies."

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

"From the beginning, we have made 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," the company says.

"Throughout this pilot and beyond, our goal is to provide you with an app that is secure, simple to use, and in accordance with applicable laws." Novi will only share information with other Facebook companies to assist us in keeping Novi safe for everyone, complying with the law, providing basic functionality, and advertising Novi services. Even in these cases, Novi will not share your financial information with Facebook for the purpose of Facebook's own advertising."