Those plastic cards in your wallet will soon be heading to the same junkyard as photographic film, cassette tapes and chequebooks. Cards are yesterday's payment systems, reckons Mark Zuckerberg and if he has his way, Visa Inc. and MasterCard Inc. are doomed because Facebook Inc. is finally making its move into financial services. The social media company is about to get regulatory approval from the Central Bank of Ireland to become an e-money institution that will allow users to store money with Facebook, make payments and transfer cash to others.
Dublin is the home of Facebook's international headquarters and the nod from Ireland's central bank will give it a regulatory passport to operate payment systems throughout the EU. In November last year, the social media company said it was moving to a new building in Dublin with enough space to double its current Irish staff count to 1,000. However, Facebook's financial service ambitions probably extend beyond Europe; according to an article in the Financial Times, the company has been in talks with several British startup businesses offering international money-transfer services.
For Facebook, the money transfer business offers two opportunities: An alternative revenue source to the cut-throat rate wars of digital advertising; and a possible way to turn some of its 1.2 billion users into actual customers. The social network managed to blindside its critics by achieving a huge surge in ad revenue in the fourth quarter, but growth in users is slowing and the challenge for the business is to generate some dollars directly from that resource rather than rely entirely on the fickle enthusiasms of advertisers.
In other words, Facebook needs to make the gradual transition from media phenomenon to dull utility and Mr. Zuckerberg appears to have chosen the soft underbelly of the financial system as his target. While the world's banks have been trying to convince regulators they are safe, fit for purpose and not too big to fail, others have been seeking to muscle in on their patch. Google Inc. is expanding its Wallet by linking it to email, such that Gmail users can send money free to other users if they link their bank accounts to the service. Vodafone Group PLC last month launched its M-Pesa mobile payments system in Romania, targeting the millions of Romanians who still lack bank accounts and remain in a largely cash economy. The telecom company hopes that it will have the same success it achieved in East Africa. Vodafone has expanded the service to Egypt, southern Africa and India with money transfers now totalling $1.2-billion (U.S.) per month.
Remittances are an obvious springboard for Facebook to launch a payments system. Families use the social network to swap photos and Facebook now has 100 million users in India, a nation that benefits hugely from cash transfers made by migrant workers and the diaspora of extended families overseas. According to the World Bank, remittances to developing countries total $414-billion in 2013, of which $71-billion went to India. Banks and money transfer companies charge substantial fees for small transactions. For Facebook, it should be a relatively easy step to offer users the opportunity to make gifts to their "friends" with a click if they link a bank account to their Facebook account.
From there, the commercial possibilities are huge and critics of social media companies will foresee a plethora of horrors when these organisations become mines of financial as well as social information. For the banks, however, the gradual loss of utility money management business will force these institutions to become more competitive and efficient lenders and investors, which cannot be a bad thing.