WhatsApp to offer digital payments… so what?
WhatsApp was established in 2011 and, in February 2014, Facebook acquired it for $19 billion –its biggest purchases to date, and one of the largest tech acquisitions in history.
WhatsApp is the most popular messaging service in 100+ jurisdictions and has more than 2.5 billion active users having been downloaded over five billion times. So, without question, it has global distribution.
Facebook shook bankers – including central bankers and governments – in June 2018 when it announced it was establishing an association that was looking to launch a digital currency. Given Facebook’s 2.8 billion active monthly users it has more than three times the users than the G7 economies’ citizens.
READ MORE: WhatsApp launches crypto pilot scheme
Governments and bankers fretted that, potentially, Facebook’s Libra (now renamed Diem) could even replace national currencies.
So, surely it is of no surprise that WhatsApp is now looking to leverage its global distribution and start enabling digital payments using its huge client base?
If you are running a business such as WhatsApp or even Facebook, much of the management’s time is about managing the risks, and trying to reduce those risks for your shareholders. Therefore, if you are sitting on cash (more than £85,000 in the UK, for example – the maximum amount that is protected by the Financial Compensation scheme) it is less risky to hold your cash in a cash-backed stablecoin, compared to depositing the cash with a bank. The reason is FRACTIONAL banking.
Fractional banking is 50 years old and, in essence, they take deposits and pay, say 0.5%, to a depositor and then lend YOUR money to a borrower and charge maybe 3.5%, and in simplistic terms keep 3% for lending out YOUR money. However, in the event that the loans are not paid, in effect, it is really your money (assuming the banks’ balance sheet is not strong enough) that could be at risk.
Alternatively, you establish a stablecoin backed 100% by the cash that you were going to deposit in the bank and ask the bank to act as a custodian or trustee – just look after my cash and keep it ‘ringfenced’, for example. The bank unfortunately will only be able to charge a fee of say 0.5% so not as attractive for them, but arguably less risky for the depositor.
The downside of this is, if all the large holders of cash did this, where would the banks get the deposits in order to make loans?
But back to WhatApp, if they start to enable their clients to not only send messages but transfer funds globally with a unit of exchange that is backed by CASH as opposed to a ‘promise to pay’ surely this could prove to be a real winner?
This enabling of Facebook to finally satisfy its ambition of reaching the unbanked which, according to The World Bank, number 1.7 billion, yet 66% of them have access to a mobile device.
WhatsApp announcement is just another sign of the traditional banks facing yet more competition – this time in their payments services but, then again, this is not new. After all, PayPal has been doing this for a while and doing it rather well – hence it is capitalised at almost 2.5 times the value of Citi bank!