Facebook launches Novi international money transfers, potentially wiping out competitors
On 19th October, Facebook (now Meta) launched Novi, its long awaited foreign currency transfer service. However, industry insiders are sounding the alarm, as Novi’s fee-free structure threatens incumbents in the remittances industry.
A couple of weeks ago, David Marcus made it official. Marcus, Chief Executive at Novi International Money Transfers, announced over Twitter that the Meta backed payment service was launching in the US and Guatemala.
According to its website, Novi International Money Transfers allows you to move funds instantly and with no fees. It plans on accomplishing this by using Diem, a cryptocurrency still under development. For now, though, it will use USDP (aka Pax Dollars), a stablecoin pegged to the US Dollar.
Should Novi deliver on its promise, it would be a groundbreaking achievement in the foreign currency exchange space. But that’s not the feature that has raised concerns among industry veterans.
Novi International Money Transfers won’t just broker instant transactions – they will also be peer-to-peer and fee-free. Novi is patterned after Facebook Messenger – save for reviewing transactions, customers will send cross border money transfers just like an instant message.
The vision of this Meta-affiliated firm is simple – they see a world where money moves far more freely and cheaply than it does now.
Unfortunately, for all the progress that remittance startups have made, commissions are still stubbornly high. On each transaction, remittance firms skim an average of 6.5% off the send amount.
Downward pressure on remittance commissions only a recent development
But before proceeding any further, let’s take a look at how we got here. Since 1872, when Western Union sent the first foreign currency transfer, the industry’s profit centres have been simple to understand. Remittance firms make money in two main ways – through transaction fees and exchange rate margins.
Back in the 19th century, Western Union was the only show in town. So naturally, they charged high rates. A competitor didn’t show up until 1940, when Moneygram joined the fray. And even then, Moneygram was content to not rock the boat.
Real change in foreign currency exchange didn’t occur until recently. Firms like Moneycorp and OFX, which started in 1979 and 1998, respectively, did their best to challenge the status quo, but failed to gain much traction.
It wasn’t until 2011 that a real shot got fired across Western Union’s bow. That year, Transferwise (now Wise) launched with a bold premise: remittance senders should get the interbank rate on foreign currency transfer.
By paying only a low transaction fee, everyday people suddenly got deals previously only enjoyed by high net-worth customers.
The success of this business model opened the floodgates. Suddenly, scores of startups offering low/no fees were lifted by a rising tide of consumer/business interest. WorldRemit, Remitly, and Azimo are just a few that surged to prominence.
This development did what the World Bank had failed to do – exert downward pressure on remittance commissions. In 2012, the IMF reported that remittance commissions averaged 10%, with some markets averaging 15% to 20%.
But thanks to increasing competition through the 2010s, that number is now at 6.5%. According to experts, it’s still too high to declare victory, but progress has indeed been made.
Novi poses a grave threat to existing remittance firms
However, industry insiders say the launch of Novi Money Transfers threatens this progress. Over the past decade, the stagnant rates/fees of banks, Western Union, and Moneygram have been the target of firms like Wise, Moneycorp, and Airwallex.
And on that front, these firms have enjoyed a great deal of success. When one does an international money transfer comparison, these firms offer trades that save their customers hundreds or even thousands of pounds versus legacy financial institutions.
But Novi isn’t taking on the banks. Instead, with their no-fee, no-margin model, they are taking on the entire remittance industry. After all, it’s tough to compete with “free”.
Indeed, failing to charge customers anything has many observers scratching their heads. In an interview with Axios last month, Novi head David Marcus admitted to the confusion surrounding their business model.
In that article, he remarked that “...one of the things that I think failed at was actually explaining how we would make money," referencing a meeting with federal regulators in 2019.
In fairness, he later went on to say that Novi plans to charge for payments between customers and merchants by “...2023 at the earliest.”
However, the lack of transparency from Meta in prior years has led some to read between the line. According to anonymous sources, there is a sense that Meta intends to use its vast financial resources to muscle its way into the remittances industry.
For now, though, competitors are putting on a brave face. In a recent interview with Forbes, Euronet CEO Michael Brown, whose FinTech conglomerate owns Ria Money Transfer and XE Money Transfer, said that his firms hadn’t “...really felt much pricing pressure.”
Finishing his thought, he also opined that “...this idea that all of a sudden we're under the gun on pricing, I don't think is accurate.”
However, it is important to point out that Novi is in the early stages of its launch. As mentioned earlier, their pilot project is limited to just two countries – the United States and Guatemala.
Additionally, they are currently using Pax Dollars (not Diem as originally planned). Because of this, current traffic on Novi won’t move the needle much.
But, when an easier-to-use cryptocurrency (like Diem) is adopted, and more countries join (like Mexico and The Philippines), things could change – and fast.
Facebook/Meta has a track record of inaction/bad behaviour
Meta is a global juggernaut. Facebook, the largest social network on the planet, not only boasts over 2.8 billion users, but 74% use the platform daily. Whatsapp and Instagram aren’t far behind, with about two billion and 1.4 billion users, respectively.
That’s an unfathomably large audience. Consequently, decisions made in the Meta front office have enormous real-world implications.
Unfortunately, many of those choices have had decidedly negative impacts. For years, Facebook executives solicited research on the mental health impact of their platforms. But, when it became clear that Instagram made teen girls feel worse about their bodies, they took no action.
But that’s just the start. In the run-up to the 2016 US federal election, Cambridge Analytica, a political consulting firm with ties to the Trump campaign, managed to harvest the personal information of 87 million American users.
Using the data gathered, the firm created political stratagems that contributed to former President Donald Trump’s victory.
But that wasn’t the only Facebook trouble related to #45. In the days leading up to the exchange of power between Trump and Biden, some conservative partisans used Facebook Groups in an attempt to stop it.
The “Stop the Steal” movement culminated in the 6th January attacks on the Capitol Building. Only afterward did Facebook censor groups related to this campaign.
And then, there has been the ongoing, messy relationship between Meta and privacy. From Facebook's founding to the present day, examples of the company's disdain for this issue are plentiful.
They’ve tracked users after repeatedly promising not to, have quietly changed their privacy policy numerous times, and have lobbied against protections worldwide.
Knowing Meta’s past is making foreign currency exchange insiders nervous. Meta executives realise this, so during the launch of Novi International Money Transfers, they have emphasised how they plan to make the world a better place.
Novi CEO David Marcus has made this case repeatedly in recent days. During his interview with Axios, he promoted their plan to use Diem cryptocurrency, saying that it would “...really lower the bar for accessibility to a modern financial system.”
However, at the same time, he found himself at odds with Meta’s past, conceding that they’re “...starting with a trust deficit that we need to compensate [for].”
Novi money transfers just another facet of the Metaverse
Mark Zuckerberg envisions a future where people interact with each other in the “Metaverse,” a virtual reality construct. And to enable seamless e-commerce transactions on this platform, a quick, cheap way to exchange currency is needed.
That’s where Novi International Money Transfers comes in. By using a cryptocurrency common to wallet holders worldwide, foreign currency transfer can happen instantly, and as of now, for free.
Pair that with everything else the Metaverse promises (e.g., immersive gaming, global nightclubs, virtual shopping malls, etc.), and it’s certainly a revolutionary vision.
But given Meta’s track record, observers fear it could quickly morph into a dystopian nightmare. The risks are apparent: age-inappropriate content, intrusive advertising, and the unchecked presence of hate groups are just a few ways things could go horribly wrong.
And should Meta decide to flex its monopoly muscles, the cost of e-commerce and remittances could spike. If Novi maintains its fee-free cross border money transfers beyond 2023, it could clear the field of competition. After that, they would be free to introduce oppressive fees and exchange rates.
Some doubt that this scenario would come to pass. However, in response, industry insiders point to Meta’s significant financial reserves. For example, in FY 2020, Facebook reported an annual income of more than 29 billion USD and 62 billion USD cash-on-hand.
With this war chest, it believes Meta could slowly starve its rivals over time.
