Why haven’t startups—or Facebook—leveraged Facebook’s massive user base for money-transfer services?
Payments
Asked by Question Bot04/Dec/20141 answer
1 Answer
F
Faisal Khan
Answered 04/Dec/2014
Payments on the Facebook platform for commercial money transfer services has been the proverbial $64 Million question amongst all those in the payments space.
From what I know of friends in Facebook, is that they are working on the payments space. Actively. None can disclose too much, but let me share some extrapolated understanding.
To provide a little bit of perspective, here is a statement of Facebook's filing with U.S. Securities and Exchange Commission (SEC): (filed for year end (31st December 2012).
From the Government Regulation clause on page 11/12
and under the clause: Payment transactions on the Facebook Platform may subject us to additional regulatory requirements and other risks that could be costly and difficult to comply with or that could harm our business. (Page 24)
Source: FB-12.31.2012-10K
As per my knowledge, a team of 7-8 people are working in understanding the regulatory framework for all countries concerned and they are prioritising which markets to enter first and which one will follow later.
There is an active team looking at compliance, risk, fraud, AML/KYC, etc. for all these countries and territories.
Though I have not followed up recently, Facebook was in the news last year (in Feb/2012) when they cited that they had applied and received money transmitter licenses in 15 states already. Article reference: Facebook Fast-Tracks Its Payments Business
I am sure the number has grown by now (will update this answer in the future once I have more information as to how many more states have granted a money transmitter license to Facebook).
In Russia for example last year it was reported that Facebook is ready to transfer the money of Russians supported "Russian Standard" and "http://Bank24.ru" (the article is in Russian and you can use Google to translate the page): Facebook начнет переводить деньги в России с помощью банков «Русский стандарт» и Банк24.ру - РБК daily
A lot of work is being done to reduce the number of steps it takes to make a payment on Facebook. Last year Steven Musil of CNET (product) wrote an article on this: Facebook launches 'low-friction' mobile payments system
Facebook is now getting more and more comfortable in handling payments on its platform. Though there are restrictions. This is one reason why Facebook will not allow external app developers &/or companies to use its platform for Person-to-Person payments or using the Facebook canvas as it is called to make a payment (in one form of credit) transferable to another app (in another form of credit). See: Facebook Platform Policies and Facebook Developer Payments Terms
It is also important to note, Facebook now has adequate experience with Carrier based billing for its Facebook Credits program.
So with all this happening, where is Facebook heading with payments? There is a debate within Facebook if FB wants to compete with PayPal by offering P2P payments. There has been discussion on how PayPal could somehow natively be embedded within Facebook for P2P payments. There has been much debate if FB should enter into the payments space at all (for purposes of Money Transfers). A lot of well known players have approached Facebook directly (and indirectly) for money transfer services. The primary one being Western Union, who wanted to leverage the 1+ Billion MAU (Monthly Average Users) of Facebook for a possible platform of doing money transfers.
If I were to wage a bet, I would lean towards a Facebook + Western Union partnership. Facebook can easily partner up with anyone to service over 200+ countries & territories, there is no stronger candidate than Western Union.
WU is licensed in almost every conceivable country either directly or via a correspondent banking/MTO partner.
They know the KYC/AML rules of every territory they operate in and could very well integrate their systems with Facebook with a little bit of effort.
For this relationship, FB/WU would have to agree on some preferential pricing. Such a marriage can represent a huge (potential) income stream for Facebook, and they would piggy back on Western Union's licenses in all the territories that WU and FB jointly operate in. Visa/Mastercard cannot offer such an arrangement to FB, neither can any bank (how many banks are operating in 200+ countries & territories).
However, that is just a speculative assessment. In Silicon Valley, opposite decisions do happen. Facebook may decide to go their own route on this, starting with US alone for P2P payments, which in itself would be a big step (they would have to cut-off their relationship with PayPal for this). They can, just like PayPal then extend outwards and start integrating with other countries (Canada, UK, EU, etc.)
Having talked to many people, both within Facebook and outside of it, related to the payments space, the question is most certainly not one of if Facebook will end up doing P2P payments, but a matter of when.
What has surprised a lot of people is the "when" part. Some pundits say its long overdue. Many herald that 2012 was the year of payments for FB, now some say 2013. Some are not sure. This is true for Apple and Amazon too (two other contenders who are seen most likely to enter into the payments space). Does the first mover advantage still remain? Or is everyone holding on their bets to see who comes out first and then re-evaluate their position and strategy and then launch?
Everyone seems to be very tight-lipped on this, and perhaps rightly so. I personally feel, Facebook is under tremendous pressure to launch a P2P system, but they are being very cautious about it, considering the great regulatory framework to which they have to adhere, fraud and risk mitigation AML/KYC controls and then how to handle the money itself? How will one pay and then get paid? It would not surprise me one bit if Facebook launched its own prepaid Debit card (in association with either Visa or Mastercard).
A great article to get more perspective on Payments by the four giants (Facebook (product), Amazon.com (product), Google (company) and Apple (company)) is to read a great article by Farhad Manjoo who wrote an article in Fast Company called: The Great Tech War Of 2012.
From what I know of friends in Facebook, is that they are working on the payments space. Actively. None can disclose too much, but let me share some extrapolated understanding.
To provide a little bit of perspective, here is a statement of Facebook's filing with U.S. Securities and Exchange Commission (SEC): (filed for year end (31st December 2012).
From the Government Regulation clause on page 11/12
Various laws and regulations in the United States and abroad, such as the Bank Secrecy Act, the Dodd-Frank Act, the USA PATRIOT Act, and the Credit CARD Act, impose certain anti-money laundering requirements on companies that are financial institutions or that provide financial products and services. Under these laws and regulations, financial institutions are broadly defined to include money services businesses such as money transmitters, check cashers, and sellers or issuers of stored value.
Requirements imposed on financial institutions under these laws include customer identification and verification programs, record retention policies and procedures, and transaction reporting.
To increase flexibility in how our use of Payments may evolve and to mitigate regulatory uncertainty, we have applied through subsidiaries for certain money transmitter licenses in the United States and similar licenses in certain foreign countries, which will generally require us to show compliance with many domestic and foreign laws relating to money transmission, gift cards and other prepaid access instruments, electronic funds transfers, anti-money laundering, counter-terrorist financing, gambling, banking and lending, and import and export restrictions.
and under the clause: Payment transactions on the Facebook Platform may subject us to additional regulatory requirements and other risks that could be costly and difficult to comply with or that could harm our business. (Page 24)
Payment transactions on the Facebook Platform may subject us to additional regulatory requirements and other risks that could be costly and difficult to comply with or that could harm our business.
Our users can use the Facebook Platform to purchase virtual and digital goods from our Platform developers using our Payments infrastructure.
Depending on how our Payments product evolves, we may be subject to a variety of laws and regulations in the United States, Europe, and elsewhere, including those governing money transmission, gift cards and other prepaid access instruments, electronic funds transfers, anti-money laundering, counter-terrorist financing, gambling, banking and lending, and import and export restrictions.
In some jurisdictions, the application or interpretation of these laws and regulations is not clear. To increase flexibility in how our use of Payments may evolve and to mitigate regulatory uncertainty, we have applied for and received certain money transmitter licenses in the United States and expect to apply for certain regulatory licenses in Europe, which will generally require us to demonstrate compliance with many domestic and foreign laws in these areas.
Our efforts to comply with these laws and regulations could be costly and result in diversion of management time and effort and may still not guarantee compliance. In the event that we are found to be in violation of any such legal or regulatory requirements, we may be subject to monetary fines or other penalties such as a cease and desist order, or we may be required to make product changes, any of which could have an adverse effect on our business and financial results.
In addition, we may be subject to a variety of additional risks as a result of Payments on the Facebook Platform, including:
- increased costs and diversion of management time and effort and other resources to deal with bad transactions or customer disputes;
- potential fraudulent or otherwise illegal activity by users, developers, employees, or third parties;
- restrictions on the investment of consumer funds used to transact Payments; and
- additional disclosure and reporting requirements.
Source: FB-12.31.2012-10K
As per my knowledge, a team of 7-8 people are working in understanding the regulatory framework for all countries concerned and they are prioritising which markets to enter first and which one will follow later.
There is an active team looking at compliance, risk, fraud, AML/KYC, etc. for all these countries and territories.
Though I have not followed up recently, Facebook was in the news last year (in Feb/2012) when they cited that they had applied and received money transmitter licenses in 15 states already. Article reference: Facebook Fast-Tracks Its Payments Business
I am sure the number has grown by now (will update this answer in the future once I have more information as to how many more states have granted a money transmitter license to Facebook).
In Russia for example last year it was reported that Facebook is ready to transfer the money of Russians supported "Russian Standard" and "http://Bank24.ru" (the article is in Russian and you can use Google to translate the page): Facebook начнет переводить деньги в России с помощью банков «Русский стандарт» и Банк24.ру - РБК daily
A lot of work is being done to reduce the number of steps it takes to make a payment on Facebook. Last year Steven Musil of CNET (product) wrote an article on this: Facebook launches 'low-friction' mobile payments system
Facebook is now getting more and more comfortable in handling payments on its platform. Though there are restrictions. This is one reason why Facebook will not allow external app developers &/or companies to use its platform for Person-to-Person payments or using the Facebook canvas as it is called to make a payment (in one form of credit) transferable to another app (in another form of credit). See: Facebook Platform Policies and Facebook Developer Payments Terms
It is also important to note, Facebook now has adequate experience with Carrier based billing for its Facebook Credits program.
So with all this happening, where is Facebook heading with payments? There is a debate within Facebook if FB wants to compete with PayPal by offering P2P payments. There has been discussion on how PayPal could somehow natively be embedded within Facebook for P2P payments. There has been much debate if FB should enter into the payments space at all (for purposes of Money Transfers). A lot of well known players have approached Facebook directly (and indirectly) for money transfer services. The primary one being Western Union, who wanted to leverage the 1+ Billion MAU (Monthly Average Users) of Facebook for a possible platform of doing money transfers.
If I were to wage a bet, I would lean towards a Facebook + Western Union partnership. Facebook can easily partner up with anyone to service over 200+ countries & territories, there is no stronger candidate than Western Union.
WU is licensed in almost every conceivable country either directly or via a correspondent banking/MTO partner.
They know the KYC/AML rules of every territory they operate in and could very well integrate their systems with Facebook with a little bit of effort.
For this relationship, FB/WU would have to agree on some preferential pricing. Such a marriage can represent a huge (potential) income stream for Facebook, and they would piggy back on Western Union's licenses in all the territories that WU and FB jointly operate in. Visa/Mastercard cannot offer such an arrangement to FB, neither can any bank (how many banks are operating in 200+ countries & territories).
However, that is just a speculative assessment. In Silicon Valley, opposite decisions do happen. Facebook may decide to go their own route on this, starting with US alone for P2P payments, which in itself would be a big step (they would have to cut-off their relationship with PayPal for this). They can, just like PayPal then extend outwards and start integrating with other countries (Canada, UK, EU, etc.)
Having talked to many people, both within Facebook and outside of it, related to the payments space, the question is most certainly not one of if Facebook will end up doing P2P payments, but a matter of when.
What has surprised a lot of people is the "when" part. Some pundits say its long overdue. Many herald that 2012 was the year of payments for FB, now some say 2013. Some are not sure. This is true for Apple and Amazon too (two other contenders who are seen most likely to enter into the payments space). Does the first mover advantage still remain? Or is everyone holding on their bets to see who comes out first and then re-evaluate their position and strategy and then launch?
Everyone seems to be very tight-lipped on this, and perhaps rightly so. I personally feel, Facebook is under tremendous pressure to launch a P2P system, but they are being very cautious about it, considering the great regulatory framework to which they have to adhere, fraud and risk mitigation AML/KYC controls and then how to handle the money itself? How will one pay and then get paid? It would not surprise me one bit if Facebook launched its own prepaid Debit card (in association with either Visa or Mastercard).
A great article to get more perspective on Payments by the four giants (Facebook (product), Amazon.com (product), Google (company) and Apple (company)) is to read a great article by Farhad Manjoo who wrote an article in Fast Company called: The Great Tech War Of 2012.