Facebook is taking the financial world by storm with its proposed new currency, Libra. Regulators, however, have their doubts and some have threatened an outright ban of the digital currency before it even gets off the ground. But despite all the hype and misinformation about what exactly Libra is and how it fits into Facebook’s long-term business strategy, the news has focused attention on a market ripe for disruption.
The global remittance market, one of the targets for the new currency, is stuck in the last century and Facebook’s leadership has identified untapped potential. Still, can a social-media company really improve the lives of the global poor? For countries such as those in the Arab Gulf region, where hundreds of thousands of foreign workers send money home each month, this is a key question.
The global remittance market hit an all-time high in 2018. The World Bank estimates that annual remittance flows to low- and middle-income countries reached US$529 billion in 2018, an increase of 9.6% over the previous record high of $483 billion in 2017. The bulk of these remittances are subject to exorbitant transfer fees and use ancient technology.
With the explosion of cheap smartphones and growing Internet coverage in the developing world, an entirely new class of customers – let’s call them the global poor – have entered the market. This is particularly noticeable across Africa, where poorer Africans now have access to WhatsApp and digital payment services that have transformed communication, shopping, and how people are able to secure money while planning for the future.
This development has also transformed how remittance services function. In South Africa, for example, digital applications proliferate for Zimbabwean migrant workers. Sending money home was once subject to levies as high as 18%, and cash is an insecure way of storing value. With digital options, levies hover around 5% and the money is not as easy to steal.
Trust is the most important component of the remittance trade, as people want to ensure their money will arrive securely at its destination. Despite recent controversies over its handling of user data, Facebook is widely trusted in emerging markets. Through communication applications such as WhatsApp, which Facebook bought in 2014, the social-media giant is a daily fixture of our lives. So if you trust WhatsApp or Instagram (another Facebook-owned application with more than a billion users), why not Libra?
While Facebook might have found a market ripe for a good shake-up, rolling out Libra is still going to be anything but easy. Regulators around the world have expressed fears about Facebook controlling what could be one of the world’s largest currencies. There is also the problem of bank accounts in many key markets. According to Facebook’s own research, half of all adults in Bangladesh, China, India, Indonesia, Mexico, Nigeria and Pakistan don’t have bank accounts. Getting these people into formal financial services is going to be an enormous challenge.
Digital payment services in Africa have found ways around the bank-account issue by relying on field agents to receive cash for transfers, but it is unlikely that Facebook will be able to operate an international team of agents to help users move their Libra around.
Then there is the issue of cryptocurrency. While Facebook refers to Libra as a cryptocurrency (it is built on a blockchain, after all), the “coin” is certainly not the next Bitcoin. While the code is open-source, it is not a blockchain that requires no permission, like Bitcoin. Instead, it will be managed by a handful of major companies, including Uber and Spotify, from a base in Switzerland. Facebook clearly wants to build on the hype of cryptocurrencies, but that might end up hurting Libra’s prospects in key markets. In India, Pakistan, China and Bangladesh, cryptocurrencies either are illegal or in the process of being banned.
Regardless of whether Libra is a success, Facebook has revealed the untapped potential of the remittance market. The social-media company is banking on its trust profile and global footprint to bring in users and retain them.
But Facebook is not the only potential player in this new market. With its reliance on foreign labor, the United Arab Emirates has long had a major stake in the international remittance trade. Home to people from roughly 200 nations, the UAE has an established and trusted remittance sector. As a capital of the emerging world, where the new global middle class converges for travel, trade and commerce, Dubai is perfectly suited to disrupt the remittance market further. Not only can local venture capitalists invest in payment solutions throughout the developing world, but the country can also leverage its trusted name to back a similar type of product to Libra.
Libra should be a wake-up call for technology companies and governments in the Middle East. With the right digital innovation, like a government-backed blockchain specifically designed for remittances, the UAE, for one, could command one of the most lucrative and overlooked spaces in the global economy.
Joseph Dana, based between South Africa and the Middle East, is editor-in-chief of emerge85, a lab that explores change in emerging markets and its global impact.
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