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Financial services from Facebook?
Is Facebook planning to enter the European money transfer market? Yes, according to a report in the Financial Times that has been widely disseminated in the media. If so, it’s a bold move, but potentially a highly lucrative one.
Let’s look first at the lucrative bit. The global money transfer market is huge and growing. One driver is remittances: money sent home by migrant workers. The figure below shows net transfers (inflows minus outflows) for several regions of the world. It is clear that between 1990 and 2010, there has been a vast increase in the volume of funds remitted from the developed economies of the US and Western Europe to lower income regions. A similar chart for migration shows a mirror image, with increasing numbers of people moving from lower-income countries to seek work in the developed economies. Currently, global remittances amount to around $400 billion a year. Companies such as Western Union charge fees of around 10% of the amount transferred, so money transfer companies are competing for a remittance market of $40bn.
Even within Europe, demand for money transfer services is likely to be increasing due to the rapid growth of e-commerce. MarketLine research indicates that the European online retail market was worth $179 billion in 2012, and is set to grow at an annualized rate of 11.4% over the next few years, bringing it to $395 billion in 2017. The details of Facebook’s proposal are not known, but if it includes payment services it would be able to access another large and buoyant market.
But how about the boldness of the move? The challenge for Facebook will be to take market share from some well-established incumbents. For example, in FY2013, Western Union had revenues of $5.5 billion, transferred a total of $82 billion between individuals, and had a network of 500,000 offices around the world where payments can be both made and received as cash – an important consideration in the remittances business, where recipients may live in under-banked communities. It has operated fund transfer services since 1871, initially alongside its telegram business, and as its sole line of business since 1980. It’s fair to say that it is the leading provider of such services, although there are many smaller competitors in the remittances market.
PayPal has a similarly strong position in the payments (C2B) market. Its website makes mention of its appeal to those “currently underserved by traditional payment mechanisms”. And of course, in Europe, those traditional mechanisms (such as debit, credit, and pre-paid cards) are also accessible to many potential Facebook customers.
A key strength, though, will be the sheer size and geographical extent of Facebook’s user base. As of 2012, the four largest Facebook user bases after the US were low- or middle-income countries: India, Brazil, Indonesia, and Mexico, with a combined base of 210 million people. Even people with little disposable income are able to use Facebook at no cost, provided they can access a computer or smartphone.
What this means is that one traditional entry barrier for consumer financial services companies – establishing a branch network – has been demolished by the internet. This is great news for Facebook, but it will need to build an FS brand to match those of the incumbents if it is to challenge them successfully.
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