The First National Bank of Facebook
The company that rebranded the word "friend" may soon take up a more ambitious makeover: the word "bank."
Facebook Inc. is on the verge of winning approval from Ireland's central bank to allow its users to store and exchange money. The company's plans are not yet clear, but regulators are right to allow more experimentation.
Facebook will reportedly focus on the remittance market, which is growing and ripe for disruption. The World Bank estimates that remittances will top $600 billion in 2014, most of it to developing countries and more than triple the amount a decade earlier. That figure is three times greater than all the world's aid budgets. But transaction fees, averaging 9 percent, are way too high. Competition from Facebook could bring those fees down quickly.
Facebook is hardly alone in its ambitions; Wal-Mart Stores Inc., the world's largest retailer, introduced last week a service that will allow the unbanked to transfer money among its 4,000 U.S. stores.
It remains to be seen whether Facebook's new service will allow money to move across borders as easily and instantaneously as cat videos and family photos. It probably will be less expensive than existing services -- assuming Facebook takes advantage of its size and low overhead to charge less than the hefty fees traditional banks' money-transfer services now extract. (Wal-Mart says it will charge half what some competitors now do.)
As regulators consider these new models, they should be flexible. Rules issued by the U.S. Consumer Financial Protection Bureau under the 2010 Dodd-Frank Act are a good example. Companies that send remittances from the U.S. must disclose the exchange rate that will be applied, the fees to be collected in the U.S. and overseas, and the pre-tax amount that will actually be delivered.
The U.S.'s money-laundering regulations are another story. Last year, European banks closed the accounts of numerous institutions in developing countries that allegedly lacked proper money-laundering safeguards for remittances from migrant workers. The pressure to crack down came from the U.S.
Perhaps U.S. regulators should rethink their approach. Why not apply the rules in proportion to the risk involved? They could, for example, allow some leeway for as much as, say, $250 in remittances when transferred through Facebook or a similar secure network.
It almost goes without saying that the transformation of the banking industry is already well under way. Hundreds of millions of people worldwide use mobile applications to send and receive money.
For the 2.5 billion people in emerging markets with no access to a bank, however, Facebook's entry into the market could do more than make it cheaper to send earnings back home. If it allows them to establish credit, obtain loans, meet payrolls, pay household bills and invest, the bank of Facebook could find itself with a lot of friend requests.
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