Facebook Payments & Developing Countries

I wrote down a few thoughts on Facebook's cryptocurrency efforts, and how they might affect their work in developing markets. I welcome all criticism and arguments.

Spend a minute looking at Facebook’s Q1 2019 Report and you’ll find a healthy business firing on all cylinders. In spite of all the negative news on Facebook, it seems to be doing well - profits are up, user numbers are growing and all is well with the world. On deeper examination, one sees the justification for some of Facebook’s recent moves.

For one, revenue generation is heavily concentrated. In 2018, Facebook made nearly half of all its revenues from the US and Canada. Each user in North America generated several times more revenue that users in other regions:

  • 4x higher than the average
  • 3x higher than Europe
  • 10x higher than South-East Asia
  • 15x higher than the Rest of the World

It is often said that with many social products, North American and European users subsidise those from the developing world. When we ‘torture’ Facebook’s numbers, we get a picture that seems to confirm that. Using revenue numbers, operating margin and user numbers, one can estimate that it costs Facebook about $3.43 to service each user. The math is by no means perfect - I make a few assumptions, including that the costs of serving every user are more or less the same across the world. Assuming that the number is correct, we get a sense of how each region contributes to Facebook’s bottom line.

Region ARPU Margin
North America 27.99 88%
Europe 9.17 63%
South-East Asia 2.69 -28%
Rest of World 1.88 -82%

Source: Facebook Q1 2019 Report

What’s more, Facebook’s most valuable market isn’t growing as fast as the others. In 2018, FB North America added 1 million net new users. Meanwhile, South-East Asia added 74 million, and the Rest of the World added 45 million. Together, these regions make up 72.3% of Facebook’s user base while contributing less than 30% of its revenue.  As such, Facebook might actually be losing money in its largest and fastest-growing  markets.

There are many possible reasons for this. For one, North America and Europe are wealthier, and while mobile technology has transformed lives in the developing world, many people there are still very poor.  

More importantly, Facebook makes about 98% of its revenue from advertising. Unfortunately, developing countries have some of the smallest advertising sectors in the world.

Region Market Size ($B) FB's Share of Market
North America 205.99 13%
Europe 119.22 12%
South-East Asia
(excl. China)
100.31 10%
Rest of World 32.97 16%

Source: Statista.com

It is interesting to note that Facebook is able to take a similar share of the market in developing countries as they do in North America and Europe. One can thus conclude that Facebook’s situation is not a matter of taking more share, it’s that the advertising markets in these regions are so small that the resulting revenue doesn’t match up to the user penetration.

There’s some irony in this. In many of these markets, Facebook is not just part of the internet, it is the internet. Some people in the developing world aren’t even aware that there is an internet beyond Facebook and Whatsapp.  This must present a certain conundrum for Facebook - growing like gangbusters in a market where the unit economics don’t make sense, and market conditions mean that they may never turn around.

With that in mind, it seems that, if Facebook wants to reap the rewards for their investments in markets like India and Africa, they need to do any (or all) of three things.

First, they probably need to go beyond advertising and integrate more deeply with the brand-consumer value chain. Facebook’s key value proposition is that it’s one of the most efficient ways to reach consumers. Until recently, “reaching consumers” meant advertising and messaging. Consumers would need to leave Facebook (or its properties) to complete transactions.

However, this is beginning to change. Instagram’s e-commerce tools mean that brands can go beyond advertising and sell their products inside the app. In the US, Facebook is integrating shipping services to Marketplace - allowing sellers use the platform to send products from within the app. Unfortunately, these products are not available to brands across the world - many merchants still find themselves locked out of one-click purchases - very possibly because executing this requires deep integration with local financial institutions to handle everything from returns, chargebacks etc.

Secondly, Facebook should probably start actively participating in the influencer business - where businesses spent an estimated $ 1.7B last year. Today, influencers work with brands and consumers on Instagram without Facebook’s direct involvement. Contrast this with platforms like Twitch and YouTube that provide monetization tools for their influencers, while taking a percentage of that revenue.

What’s probably most important in developing world markets is for Facebook to capture some of the value generated from peer-to-peer relationships. Here’s where Facebook can really shine - by allowing the world’s largest network trade and transact, Facebook could completely transform relationships, and by extension, its business. In the developing world, a lot of commerce is informal and handled peer-to-peer. Facebook has realised this, and invested in developing its groups and marketplace products, empowering millions of people around the world to provide small-scale value to people around them. One of the largest Facebook groups in the world - Fin - started as a women’s group in Nigeria, and marketplace groups are extremely popular across the continent to facilitate peer-to-peer trade.

I believe that somewhere in these 3 ideas is the logic underpinning the work Facebook is doing on launching its own cryptocurrency, as reported by the Wall Street Journal [paywall].

This is not the first time this has been rumoured, but this report went into more detail than previously known. For one, we now know that Facebook plans to let users send the coin to each other and to make purchases on the internet (on Facebook and off Facebook). We also now know that the value of the coin will be pegged to a real-world currency (a so-called stablecoin).

If you’re not familiar with stablecoins, they’re a response to a particular challenge with cryptocurrencies. Crypto prices tend to fluctuate wildly in relation to ‘real-world’ (fiat) currencies. As a result, they’re not very good for day-to-day transactions. Imagine a situation where you have a crypto asset that swings in value by 20% in 24 hours - pay for goods worth $1,000 and the seller might end up with $ 1,200 or $ 800 in value by the time the transaction is done. Enter stablecoins - crypto assets that have their value pegged to a fiat currency, so users can have some assurance that the value they exchange is relatively stable.

The most interesting bit of this report is that Facebook is raising $1 billion from potential partners, including Visa, Mastercard, banks and e-commerce operators. Facebook made $15 billion in revenue last quarter, so they’re not hurting for cash. So why do they need to raise money? To answer this, it’s a good idea to understand one of the key challenges faced by the cryptocurrency industry - integration with the traditional finance industry. Many banks and finance institutions have been reticent about providing banking services to cryptocurrency firms. Even the most well-known and widely-used stablecoin - Tether - has struggled with establishing its banking relationships with reputable institutions. This has contributed in no small part to its recent legal troubles with the US government. By involving partners from the start, Facebook seems to be trying to ensure that its cryptocurrency has no trouble accessing the traditional banking system. Furthermore, every launch partner is now invested in making it a success.

While Facebook has not officially said much about this product, we can make reasonable guesses as to how it would work.

For one, you will be able to buy GlocalCoin (as the BBC reports it will be called) with any of the payment methods that currently work on GlocalCoin. This would serve as an onramp to the crypto network - you exchange your fiat for GlocalCoin. Once you have the coin, you will be able to send it to anyone else on the network via Facebook, Messenger, Whatsapp or Instagram. This includes friends, influencers or merchants on Facebook. Merchants will also be able to integrate the ability to receive GlocalCoin on their websites and apps (like the Like button) and you’ll be able to buy stuff from them outside  Facebook.

Beyond that, it makes sense that you will be able to earn GlocalCoin. There are hints that Facebook might try to use its currency to incentivise certain behaviour on its platform, including and especially authentic feedback for content and advertising. It’s easy to see a situation where brands apportion a part of their marketing spend on Facebook to provide rewards to users for participating in surveys or responding to advertising. There’ll eventually be a ton of other kinds of opportunities - including but not limited to the ability to pay for content - think premium Watch shows or articles (similar to Medium), the ability to create or join paid groups, as well as the opportunity to buy filters, stickers and other digital swag for your profile or stories.

Assuming everything works as planned (more on that later), this opens up a ton of opportunity for everyone. For one, many of Facebook’s largest properties would move from simply large to large and valuable.

Think about a product like Marketplace. Instead of it to just connect buyers and sellers, Facebook will be able to participate in the actual transactions. One of the ways Facebook beats out other players in this space is in the integration of identity and social verification. Creating a situation where people can see who they’re buying from, and if they have relationships in common can increase trust in transactions done in local communities. The financial upside on this could be immense.

This repeats itself in multiple instances - groups, peer-to-peer communication etc. They become more than simply tools to keep people engaged, they become veritable profit centres in their own right.

What’s more, this benefits the advertising business immensely. Today, when a merchant advertises on Facebook, the company has no visibility into whether there was a completed transaction unless the merchant integrates code in their website or store specifically designed to do so. But with FB coin, Facebook will have visibility into the entire transaction process - from advertising to purchase. They’ll also have visibility into individuals’ other transaction habits and balances - helping to create more robust advertising profiles, making their advertising more effective, which will in turn drive more revenue to the advertising business.

Third, it might create completely new ‘industries’ on Facebook. If people can send peer-to-peer payments, they might start to use that to tip influencers they like. We already see this in some parts of Asia with ‘muk-bang’ videos - where people watch influencers eat large amounts of food and tip them when they’re entertaining. This is also behaviour replicated on platforms like Twitch. In a country like Nigeria, it’s easy to see people ‘tipping’ an influencer like Gloria Oloruntobi when they really enjoy her content; or to see her selling exclusive content to her most dedicated fans.

At the start, we can expect that people will buy only enough GlobalCoin as they need to use in the moment. However, as use cases for the currency begin to multiply and acceptance, it’s not too much to expect that users will maintain balances on the platform. Imagine a situation where a user in the United States sends some GlobalCoin to a relative in India. At the start of the program,  you’d expect them to quickly liquidate the coin so as to use the money in their day to day lives. However, when enough time has passed, it’s not too hard to imagine that small businesses, both online and offline, will begin to display their Whatsapp number or Messenger QR code and ask to receive payment there. Once there are enough outlets to spend GlobalCoin at, there will be no reason to convert as much into fiat as before. Facebook might be the company that achieves the holy grail of developing world fintech firms - be the app that digitises and takes over day-to-day transactions for billions of people. In the West, where credit cards and mobile payments are already established, it might not feel very different. However, in developing countries, this would be completely transformative. Low-cost P2P transfers can accelerate digitization of payments in a way that’s been difficult to execute in the past.

With all this, one wonders how this might affect fintech companies focused on developing countries. The answer, as with everything else is, “it depends”.

For one, Facebook will need to maintain ways for people to put and take real-world money into this ecosystem. Like I’ve explained earlier, this is why they’re raising capital from partners - they want to maintain the relationships that will ensure their payment system has exposure to the global financial system.  That will mean working with banks, payment processors and card providers. In developing world markets, FB will probably also have to work with telcos and mobile money companies to be effective. Any companies that end up as partners will probably benefit from this product launch - at least initially. Further, Facebook’s investment in helping users get comfortable with digital payments could be a rising tide that lifts all boats.

On the other hand, some companies should probably have cause for pause. The ability to send cross-border payments via Facebook or WhatsApp could prove disastrous for remittance providers. Companies offering “faster, more convenient P2P payments” might struggle to show relevance, especially if they charge money to do those, or require both parties to be on their network. Furthermore, as more transactions happen on the network, the very banks that enabled Facebook get a leg into the industry might find themselves losing customers who prefer to deal with each other using GlobalCoin.

Of course, there’s no guarantee that any of this will work. There is no shortage of product ideas from large, ascendant firms with endless capital that were brilliant on paper but went on to fail spectacularly. Facebook has a sterling reputation for execution, but in recent times, even they have struggled to launch new products successfully. This might also go that way.

More importantly, Facebook is going to have to convince governments and law enforcement agencies across the world that they will be able to successfully police this new payment ecosystem. While Facebook is pivoting towards enabling more private communications, it is not clear that transactions on this network will be private to Facebook. Would details of transactions be made available to authorities on request? Will they, in traditional crypto style, be transparent to the entire network? These questions will be important to users and governments alike. There are already big concerns about crime on Facebook. Add a payment system and concerns about terror, drugs, and human trafficking increase exponentially. Expect law enforcement to worry. Facebook will struggle with the perception that it can handle its platform, especially since it is perceived to be ineffective against the barrage of misinformation and bullying on its platforms. Just recently, the United States Senate Banking Committee sent a letter asking to better understand this system, and if Facebook had complied with regulation.

What’s likely to be unsaid but true, governments might also not be comfortable with a corporate entity with a user base larger than the largest country in the world essentially launching its own currency.

Most importantly, users will need to both trust Facebook. Some commentators believe that Facebook has irrevocably lost the trust of the public. I am not so sure. For one, user numbers show a business that’s still growing in spite of the very public backlash against it. Secondly, users prioritise convenience. If FB coin proves cheap and convenient, I expect uptake to be rapid.

Which brings me to my final point. In its most extensive form, GlobalCoin could help billions participate in the global economy in a way that hasn’t happened yet. It might also help Facebook turn the developing world into an actual profit centre for its business. But it will not be easy to execute, and we have no idea what happens to the world when a company with 2 billion monthly users layers a global financial union on top of it.

Special thanks to Osarumen, Justin and Saratu for giving a second look at this.

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