The Bank of Facebook


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Ever feel as if Facebook is taking over our lives? We use the social media website to publicize photos from memorable moments of our lives, rant about our deepest emotions and affirm our social bonds with likes and hashtags. Well it looks as if Mark Zuckerberg has decided to plunge us further in to the Matrix by entering into the financial services industry. Last week, Facebook applied to the banking regulatory agencies in Ireland, where its non-US business is based, to permit electronic transfer of funds for its members in Europe, Africa and the Middle East. If Facebook’s application is approved, users in those regions will now be able to send each other money just like the way my relatives keep sending me Candy Crush requests.

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A few years ago, Facebook attempted a similar move by creating Facebook Credits which would allow users to spend money on virtual items such as that one cute cow you were dying to buy on Farmville. However, the system was a flop and was shut down in 2012. Facebook’s new endeavor into the banking sector is different. This time around, Zuckerberg appears to be taking on money transfer companies such as Western Union and PayPal. Remittances, or the transfer of funds from expat workers to their home countries, is a large part of the economies of many developing nations. For example, China, India and the Philippines each received over $20 billion in remittances over the last year. Because of the low standard of living in these nations, many of its citizens are forced to work abroad to be able to make a living. I spent a majority of my life in Saudi Arabia and I can tell you from firsthand experience that almost a quarter of the country’s population is expat workers. Go out on to the streets and at times you may have a hard time finding a Saudi citizen. Because expat workers in these nations may not have access to traditional banking, they rely on money transfer companies such as Western Union and PayPal. With Facebook’s potential entry into this market, it could soon replace traditional money transfer firms.

The question then becomes, how much further can Facebook or other tech companies such as Google go in the banking industry? In the past several years, large traditional banks have lost consumer confidence due to outdated mobile interfaces and countless lawsuits over its past actions. People feel much more comfortable using Facebook and Twitter than they do using their online banking websites. With over a billion users, Facebook could build on its money transfer mechanism to provide even more banking services. Here is an energetic panel on CNBC discussing this issue.

As the panel mentions, Facebook has still a long way to go before we can consider it actually becoming a bank and taking on Bank of America or JP Morgan. You’re not going to be able to receive complex banking services, such as a car loan, from Facebook anytime soon. However, the banking industry is definitely evolving and with the familiarity and dependence consumers have in using social media websites, Facebook could be a threat to traditional banks in the future if they choose to go down that path. If Facebook pushes deeper into the banking sector by for example giving loans, I find it much more probable that it will partner with a traditional bank rather than becoming a bank itself. As the contributors on the CNBC panel described, being a banking entity would bring Facebook into a new realm of regulations and restrictions; a headache that I assume Zuckerberg would want to avoid.

There is one issue that makes me doubt if Facebook will be able to pull of being a financial services company, and that is privacy. The company is notorious for having shady privacy laws that its users still do not fully understand. One of the ways Facebook makes money is by selling the information of its users to advertisers and marketing companies. If you also add in the fact that Facebook is flooded with fake accounts, then its users might not trust the site to transfer funds or receive banking services from it. Despite the tarnished reputation of traditional banks, I’m probably not the only person to think that transferring funds over a bank feels safer than doing it over Facebook.

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Fake accounts are a serious issue for Facebook.

Over the past year, Facebook has acquired Instagram, Whatsapp, and Oculus VR, a virtual reality gaming company. In my opinion, these acquisitions show that  Facebook is trying to become much more than just a social media website and is actually attempting to have a larger presence in our lives. Thus, banks should ignore Facebook’s new move at their own peril.

“Payment schemes are the equivalent to credit cards in emerging markets and here is where Facebook can make progress … especially in those places where banking infrastructure is not as mature as it is in Europe or the US.”
-Brian Blau, Director at Gartner Inc.

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