Earlier this month, the WSJ reported that Facebook is building a team and getting its crypto ducks in a row to launch a “cryptocurrency-based payments system on the back of its gigantic social network.” Public details on the effort are thin and may have been outshone by news that one of Facebook’s co-founders is calling for the company to break up. But the fintech world is predictably aflutter about the perils and opportunities of a brand new digital coin that could allow users to hold and send money safely and securely to nearly every socially networked person on the planet.
Presumably, a key driver of this effort’s success will be WhatsApp, which by the last count has 1.6 billion active users. For the markets where we invest across Asia, Africa and Latin America, WhatsApp is particularly dominant — the rails upon which much of commerce already rides. It is not hard to imagine a world in which all payments occur via WhatsApp. We have seen what this could look like in India already, where WhatsApp payments have faced initial regulatory hiccups but are still poised to be a market-leading payments alternative, building on India’s quasi-government unified payments interface. Other markets, which don’t have India’s payment infrastructure and are more open to crypto innovation, could be next.
Regardless, for those of us focused on financial inclusion, Facebook’s foray into crypto is most interesting if it is serving fundamentally excluded customers and providing them with a product they really need. For all the bombast about crypto over the last half-decade, and the many business plans we have received from eager founders with Bitcoin signs in their eyes, we have yet to find models that convincingly center on the challenges of the poor farmer or mom and pop store. And, of course, the market opportunity is massive; despite the effort of organizations like ours over decades, there are still three billion people around the globe that don’t have access to the full suite of financial services they need to live financially stable lives. Recent World Bank data shows that more and more consumers are getting formally “banked,” but also that they are not necessarily saving more, accessing more credit, or becoming more resilient. These consumers and small businesses are still financially excluded, and need access to a full suite of safe and affordable products – dynamic payments, credit to grow their enterprises and insurance to withstand healthcare shocks.
Facebook crypto has a massive potential to lead underserved customers to this set of core financial services. But it is critical the technology actually makes people’s lives better and doesn’t just lead to easier ways to pay for products within the Facebook ecosystem (as Facebook credits started by allowing in-game payments to Zynga). Based on our work investing and supporting 40 inclusive fintech businesses globally — and reviewing over 2,000 business plans — we find that crypto startups keep coming back to the same handful of ideas, and it’s not altogether clear that a Facebook-backed currency solves their inherent flaws.
Crypto-based startups often focus on using cryptocurrencies as a more reliable place for the poor to put their money. In markets like Argentina and Nigeria, which have suffered from significant inflation over many years, the opportunity to move one’s money outside of that system and into a more reliable, external asset seems appealing. However, the speculative nature of most cryptocurrencies and the many challenges and costs of buying in and out of cryptocurrencies in developing markets make crypto assets a highly imperfect solution for rampant inflation.
If the rumors are true and Facebook is developing a ‘stablecoin’ that would partially solve the currency risk of their coin, but it wouldn’t solve the more fundamental issue of underserved and underbanked customers’ having limited capital to squirrel away into savings. If Facebook wants to help the enormous market of the financially underserved actually save money and keep it in their digital currency, the company needs to think more about the financial challenges of low-income individuals and the innovative ways startups are encouraging saving. We have seen, and invested in, companies that are using goals-based tools, tying savings to other financial products like lending, or offering investment products that are tailored to the poor.
Similarly, we see many companies preaching the potential of crypto to improve the cost and speed of global remittances. While we have seen some success for companies focused on the space — particularly those that are providing remittance services for small and medium businesses that are trading internationally — most of these startups ignore the reality that, for retail remittance decisions, trust matters most. Again, here Facebook should have a leg up; if I can send money to my family in India via WhatsApp, I don’t need to trust a third party entity (not to mention I don’t even need to open a new app).
However, merely having WhatsApp or Facebook involved does not solve the other core challenge of remittances for the financially excluded: that remittance recipients must find affordable and convenient ways to actually cash out and utilize capital in their local markets or, more importantly over time, to use that capital from a mobile wallet seamlessly in everyday spending. We are seeing many companies that try to solve the “keep it in the wallet” problem by adding credit products on top of wallets or allowing offline merchants to more seamlessly accept mobile money.
Facebook will have its work cut out for it to solve those higher-order challenges, though the potential of having a massive company, with this many touchpoints, heavily involved in this space is exciting, and may help engender a wave of innovative solutions. Conversely, with its well-documented monopolistic behavior in its core business, Facebook’s turn to crypto could stifle innovation in a big way if they fail to actively encourage and support early stage innovator partners, or focus only on use cases directly relevant to their current products. That would be a huge missed opportunity for Facebook and the world’s financially excluded.