Bank of Facebook is Closer to Reality than You Think

The Bank of Facebook is a concept that has been thrown around quite a bit over the past few years, as the confluence of technology and banking has eroded the traditional concept of finance. Digital banking start-ups are making a lot of noise in the so-called fin-tech ecosystem, and this was recently on display in Germany when phone carrier Telefonica teamed up with digital bank Fidor to deliver a new form of banking experience.

Telefonica, a Madrid-based telecommunications service company with 43 million customers, will use Fidor’s mobile banking service to reach untapped consumer markets. Fidor has a customer base of about 100,000 in Germany, but needs scale to expand its services. That’s where Telefonica comes into play.[1]

So, how does Facebook fit into the fin-tech ecosystem? To answer that question, we have to look at the big picture. With 1.65 billion monthly users, Facebook has the potential to set the financial world on fire. Users on the social media platform can already send money to friends and family through Messenger; the idea of expanding these services to offer chequing and savings, credit card and even lending services isn’t that big of a stretch. In short, Facebook has the sort of reach that companies like Fidor could only dream of.

Many innovative start-ups in Silicon Valley, London and elsewhere are making traditional financial service providers very nervous. Through innovative products and services, they are slowly squeezing out traditional banks and other so-called Fin-tech laggards. Banks are already looking to tap into the expanding fin-tech market, but are unsure exactly how to do so.

“Ease of use, fast service and positive customer experience are all cited as advantages over banks as FinTech companies see gains in consumer adoption, referrals and trust,” Capgemini wrote in an April 18 press release promoting its World Retail Banking Report 2016.[2]

Bankers increasingly view big technology companies as their major competitive threat. Whether it’s Apple launching its Apple Pay service or Google rolling out the Wallet, technology companies are rubbing shoulders with the major banks.[3] When technology is the variable, companies like Google, Amazon and Facebook have the clear advantage.

According to a 2015 study of 201 bankers conducted by Capgemini, more than half of respondents said non-traditional competitors pose the biggest business risk. By comparison, slightly more than 25% said incumbent banks pose the biggest threat and only 22% said new banks are the biggest source of competitive risk.[4]

The rise of bitcoin over the past four years demonstrates the growing demand for disintermediation in the financial system. Consumers want immediate access to their funds; they want to be able to send money around the world quickly, seamlessly and affordably. Technologies that make this process easier and more secure will win big with consumers.

But where bitcoin falls – merchant acceptance, instant transactions and regulation – Facebook can easily pick up the slack. The world’s largest social network has instant legitimacy; it is used by not only billions of users, but by businesses, governments and other actors. Making it the central hub of exchange and banking is a natural extension of its centrality in our social lives.

As it currently stands, sending money is expensive, especially across borders. This market is currently dominated by Western Union and MoneyGram – a duopoly that charges an average transfer fee of more than 8%. Facebook currently is not charging fees for transfers. Even if it did, it would have plenty of scope to increase transaction fees and not come anywhere close to what the duopoly is charging.[5]

As tech giants continue to enter the fin-tech space, banks and other financial service providers have a lot of work to do to convince their customers not to jump ship. Banks know this, and are desperately trying to establish new partnerships with fin-tech players in order to navigate this increasingly competitive space. In this vein, we’ll leave you with an important quote from Vincent Bastid, Secretary General of Efma:

“The willingness to partner with FinTech firms is a recognition that banks are unprepared to operate in a future that consists of a series of secure digital interconnections. By partnering with these companies, banks can gain much needed guidance in product development, as well as a stronger voice in defining a central role for themselves in the current banking environment.”[6]

The fin-tech explosion is not just about whether the Bank of Facebook will ever exist. But the merger between finance and social networking appears to be an inevitability that Facebook will be able to capitalize on better than anyone else.

[1] Lionel Laurent and Leila Abboud (July 25, 2016). “Counting Down to the Bank of Facebook.” Bloomberg.

[2] Capgemini (April 18, 2016). “Banks Struggle to Keep Pace with FinTech Disruption Finds World Banking Report 2016.”

[3] ICTC (2015). Trend Focus: Mobile Payments.

[4] Lionel Laurent and Leila Abboud (July 25, 2016). “Counting Down to the Bank of Facebook.” Bloomberg.

[5] Justin Mauldin (May 26, 2015). “The Bank Of Facebook.” Tech Crunch.

[6] Capgemini (April 18, 2016). “Banks Struggle to Keep Pace with FinTech Disruption Finds World Banking Report 2016.”

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