Are Money Transfers Headed For A "Novilution"? (The Monito Briefing Issue #4)

Hello! This week, we're looking ahead to innovations in the world of international money transfers with the promised launch of Novi, Facebook's new mobile wallet.

While we wait for Novi to launch, we take a look at what we know about the new app and its budding cryptocurrency, Diem, and consider the impact they may have on IMTOs.

Industry Highlights

Before we get started, here's what's been happening over the past two weeks:

• In his annual shareholder letter, JPMorgan Chase CEO Jamie Dimon referred to fintechs as "enormous competitive threats" that are "here to stay";
• Months after the limit was raised on contactless payments, the payment method surged to make up over 80% of in-person payments across Europe;
• Even after news emerged that Index Ventures, one of the former Transferwise's earliest investors, sold over 99% of its stock in the company from 2017 to 2019, Wise remains on course to launch an IPO in May that could value $6-$7 billion.

Novi: What We Know So Far

Novi – formerly known as Calibra – is a new digital wallet in the works by Facebook, seeking to help revolutionize the world of international money transfers by making use of the social media powerhouse’s unparalleled and already-existent network through its family of apps – namely Facebook, Messenger, and WhatsApp.

Users will instantly and seamlessly be able to send money, just as they would a message, to any contact, anywhere around the world. Here's what we know so far:

• Novi’s aim is to be available globally, for banked and unbanked populations alike. If successful, this would be a first.
• Ultimately, Novi aims to be compatible with all currencies by allowing users to exchange their local currencies with Diem (formerly Libra), a new cryptocurrency sidestepping direct exchanges between currencies and allowing transfer costs to remain low.
• Diem itself will be managed independently from Novi by the Diem Association and run on the Diem Blockchain, which will feature its own verification algorithm promising both security and less ecological impact than the energy-consuming “proof of work” algorithms used by most current cryptocurrencies.
• Novi will exist as an independent app, welcoming users who do not have a Facebook, Messenger, or WhatsApp account.
• Novi does not currently have a set launch date.

In order to maintain a low level of volatility, Diem will be backed by a reserve made up of fiat currencies and short-term government securities. Diem coins will be minted as people put their money into the system, and destroyed as they exchange them into fiat currencies.

Initially, Diem will be issued as stablecoins pegged to three specific fiat currencies: ≋USD, ≋GBP, ≋EUR, as well as a digital composite of the three called ≋XDX, but the Association plans to expand to accommodate stablecoins based on other currencies as well.

A Disruption in the Making

At the very least, the arrival of a Facebook-backed international money transfer service will move and shake the cross-border payments industry. However, it seems just as likely that a payment platform leveraging 2.8 billion Facebook users, a colossal web infrastructure, and an army of compliance professionals "would instantly become systemic," in the words of the former Bank of England governor Mark Carney.

But according to fintech specialist Faisal Kahn, the real impact of the technology on the market could be far more reaching still.

Khan — who draws comparisons between the emerging competitive environment in cross-border payments and ISPs during the early-2000s — goes so far as to say that over the next 10 to 15 years, "money transfer operators as a business might not exist" and that an entirely new nomenclature might need to emerge to keep up with the change.

"In the end, unfortunately, [Novi] will be the death of small money transfer operators," he said in a video from June 2020, explaining that without pivot the business model will likely fall into obsolescence due to not being able to compete with Novi at the price point.

What To Watch

Regardless of its precise impact, Facebook's Novi looks set to accelerate a trend that's been years in the making: an internet-driven decline in the average cost of transferring money across borders.

Measured as an average percentage of the total transaction cost, for example, the cost of sending an international money transfer has been clearly edging lower in recent years. Across all of the world's largest recipient countries, the same broad trend appears:

A similar trend is borne out in outflows, where the sending cost of transfers from the largest sources of remittances also continues to decline. For example, according to The World Bank, the cost of sending remittances between 2011 and 2018 fell —

• 3.39 percentage points from the United States;
• 6.45 percentage points from Switzerland;
• 5.56 percentage points from France;
• 1.2 percentage points from Qatar.
  

Save for the risk of global regulators taking a hard stance against Facebook's foray into digital transfers on the grounds on anti-competition, privacy, and anti-money laundering (a risk that remains all too real according to prominent Exante Data advisor Grant Wilson), it seems likely that the fall in transfer costs will continue apace if traditional payment rails are outcompeted at the price point by Novi's blockchain infrastructure.

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