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The past few weeks have been quite eventful in the digital payments industry, with Western Union (WU) announcing a strategic partnership with start-up accelerator Techstars and of course, Facebook-backed Calibra Foundation’s new digital currency, Libra.
The global digital payments market is estimated to reach $87 billion by 2023 and these two stories indicate that the finance and technology giants are investing big in payment upstarts.
The global financial services company has been investing in the payments space to fend off old competitors like MoneyGram and prevent new venture capital-backed shops like WorldRemit and TransferWise from nabbing market share.
Its omniscient presence throughout the Middle East with its bright yellow and black logo is prominent in every expat-dominated neighbourhood. Yet its fees were historically a pain point that the company has had to adapt in recent years.
Tony Fernandes, a 33-year-old Filipino expat from Umm Al Hassam, said: “When I first came to Bahrain in 2010, I sometimes paid BD5 in fees. Now, they usually have a fixed price of BD1 no matter how much I send and I even did it once from my phone. So much easier!”
Beyond the slide in fees, the 168-year-old company with branches in 200 countries has made a huge push in security and mobile transfers, with its digital transfer unit growing at 20 per cent annually.
The agreement with Techstars is the latest stroke in WU’s innovation crescendo. They are investing in 10 start-ups with innovations ranging from facial recognition to automated investing.
The Middle East, with its Sharia-compliant laws, is sometimes an afterthought when it comes to tailored investment technologies. However, its ecosystems should not just court shiny new venture capital firms for capital. Existing firms like WU have a strong presence in the region and existential competition could encourage them to build local technologies tailored to the region.
While fat cats like WU are usually slow, by leveraging capital to make a series of small bets in nimble start-ups, WU can retain its competitive advantage with the best of both worlds.
WU’s brand equity also means that much of its market sticks to the company with the largest network of brick-and-mortar shops.
Tony chooses to send money back home using WU even if others have lower fees because of its proximity to his home in Manila. He added: “I just trust it more. Not everyone has a bank account and it is so close.”
Almost 77 per cent of the Philippines and 30 per cent globally continue to be unbanked but as this number continues to shrink, WU will start to lose its brick and mortar competitive advantage.
And as more people are digitally connected with smartphones, WU’s competitors can educate customers about new options.
However, will its innovation bets and ecosystem of branches pay off? That remains to be seen as it faces competition from a whole new industry known for its massive ecosystems: internet and communication technology firms.
This brings us to possibly the biggest
recent news in digital payments globally.
Calibra, a not-for-profit Facebook subsidiary backed by 27 companies including Visa, MasterCard and PayPal, has announced the launch of Libra, a global digital currency. The currency will be transferable via Messenger, WhatsApp and a standalone app. It will allow people to send money for a fraction of current rates, once they exchange their local fiat currency for Libra.
First off, media outlets have been reporting Libra as a cryptocurrency. It is not. According to Satoshi Nakomoto, a cryptocurrency has to be trust-independent, immutable, decentralised and limited. Libra fulfils none of these conditions.
Libra is yet another digital currency, albeit with access to an ecosystem of more than two billion people.
Abdullah Almoaiqel, the co-founder of Rain, a Bahrain Fintech Bay-based digital currency exchange, notes, “We are currently actively researching adding Libra to our list of supported currencies. As long as it gets the approval of the Central Bank of Bahrain, it is in our best interest to offer what the market demands.”
Another concern with Libra comes with the announcement that the organisation will run off interest earned on user deposits. Of course, this is not Sharia-compliant no matter how altruistic it may seem.
In addition, this incentivises Facebook to maintain certain levels of user deposits, which, depending on scale and success, may affect stability of fiat currencies.
Abdullah, however, thinks otherwise, “We do not see it affecting the stability of regional currencies any time soon, if ever. The digital currency market is still quite small relative to the global fiat currency market.”
There is a lot of uncertainty around Libra’s implementation. Facebook also has to work on its own credibility and Libra needs to be independently vetted before entering local markets.
In the meantime, traditional remittance companies and pure play remittance start-ups have the battleground to themselves.