If Facebook is serious about the remittances market it needs to convince a wary New Delhi...
As global policymakers try to divine Facebook’s true ambitions for its new digital currency, Libra, one thing is clear: payments are the battleground. Even if it does not succeed, Facebook has upped the stakes for its competitors just by entering the field.
Technology businesses, payments companies and banks are each trying to become the gateway into the platform-based economy. The size of the prize for the winners can be huge: Chinese groups Alipay and WeChat Pay control more than 90 per cent of Chinese mobile payments.
Even in the west, moving money can be costly and inefficient. Those who end up paying the most are often the vulnerable, who can least afford to do so. Improving these processes offers significant returns and social benefits. That is why I argued in my Future of Finance report for the Bank of England that catalysing payments innovation should be a priority for the UK. In emerging markets, the need is greater, and the potential returns even higher. Some of the most interesting innovations are happening outside the west.
The remittance market is ripe for disruption. In India, the largest market globally for remittances, the World Bank calculates that the cost of international peer-to-peer payments was about 7 per cent, for a $200 payment. Families send back home more than $80bn a year — about one-quarter from the US and roughly half from the Middle East, according to a recent Reserve Bank of India survey.
India is also the largest market globally for the unbanked, after China. This means that if Facebook is serious about the remittances market and the unbanked, then India ought to be its number one target.
India is also Facebook’s largest international market, with more than 300m users. The most successful new payment networks of the past decade — Alipay, WeChat Pay and PayPal — each benefited from huge online platform partners to help build their networks. That said, it is not at all clear that Libra can succeed in India.
First, India has largely cracked the identification problem with its own, audacious nationwide scheme, Aadhaar, which dramatically simplifies the way networks know their customers, and helps give access to basic bank accounts.
Then there is the memory of Facebook’s previous attempt to provide its services to India’s unconnected. Its “free basics” programme, which promised to connect millions of Indians to a free version of the internet curated by the company, was stymied in 2016 by local opposition.
Facebook is also entering a fast-moving, competitive field in which the Chinese, Amazon, Apple and Google are already well ahead of Facebook. Paytm, backed by Chinese group Ant Financial, already has 300m customers in India and Google Pay has 50m. Meanwhile, Visa, Mastercard and many others are trying to make cross border payments cheaper, more secure and faster.
Perhaps most importantly, India doesn’t like cryptocurrencies and has proposed a draft bill to ban trading in them, which could carry up to a 10-year jail sentence. While there is a heated debate in cryptocurrency circles as to whether Libra really counts as a cryptocurrency, the country will take some persuading, and a lot of time to counter this wariness. That might be why local media reports suggest Libra is not targeting India. An offering using local currencies and following the Chinese playbook may have been a faster route to market.
As things stand, we don’t know enough to weigh up whether Libra will be a significant presence in the payments sector. But Facebook’s moon shot has raised the stakes for everyone involved. A far more complex payments system that uses new technology calls for updated regulation. And whether Libra is a success or not, it is already a catalyst for banks and payment companies to dramatically up their own games.