by Tom Taulli | April 14, 2014 12:19 pm
Within a few weeks, Facebook (FB) will likely get government approval in Ireland to establish an e-money institution (according to a report from the The Financial Times). It would allow the company’s users to send money to other people, similar to what Western Union (WU) and Moneygram International (MGI) do.
And Wall Street seems encouraged by the news. In today’s trading, FB stock is up nearly 3%.
Keep in mind that the company already has a payments business. But the focus is primarily for in-app purchases of virtual items and goods in games. To do this, Facebook allows acceptance of debit and credit cards, as well as eBay’s (EBAY) PayPal.
But the business hasn’t really been a driver for FB stock. Last year, the payments business grew only 9% to $886 million (compared to nearly $7 billion in advertising revenues). A key reason is that there has been a decline from partners like Zynga (ZNGA), and Facebook has not transitioned its system to mobile.
But the market potential for Facebook e-money is enormous, and that fact should have FB stock investors excited.
For the most part, it looks like the company may target the growing money transfer segment. Consider that there are more than 200 million people that live outside their country of birth, with the four biggest receiving countries being India, China, the Philippines and Mexico. Last year, the total volume was more than $179 billion.
But the traditional money transfer business has involved expensive infrastructure investments in physical locations. Facebook, on the other hand, could provide a simpler means of sending money back to friends and family. After all, in emerging markets, the mobile phone is becoming a wallet, which makes Facebook e-money a natural fit.
Facebook has some big advantages when it comes to mobile money transfer. As of the end of last year, the company had about 945 million mobile MAUs (monthly active users). At the same time, the company has been making inroads in emerging markets. Just last week, Facebook exceeded 100 million users in India, up from only 8 million in 2010, making that the second-largest market outside the U.S. But there is still much room for growth, as India has about 650 million mobile users.
The $19 billion acquisition of WhatsApp could also prove critically important. The mobile chat service has more than 450 million users, with a strong presence in Europe. WhatsApp also has a paid model (after the first year of usage, a person must pay 99 cents). In other words, its users may be more inclined to make Facebook e-Money transfers, and it would seem pretty intuitive by including a payment in a message.
Given these advantages, the $19 billion price tag for WhatsApp may make more sense — and the service could ultimately be a nice driver for FB stock.
However, there are still some risk factors. Over the past few years, the company has had a string of failures, such as Poke (a rival to SnapChat), Gifts (an ecommerce service), Home (an Android app) and Graph Search. Actually, the company has had a fairly bad dry spell. If not for various acquisitions — such as Instagram — and an aggressive move to mobile, FB stock would likely be much lower now.
Let’s not forget that the mobile payments business is intensely competitive. Google (GOOG) has had little success with its Wallet system even though the company has a huge user base and seemingly unlimited financial resources. Besides, PayPal remains a fierce operator and a trusted brand.
There are also entrenched competitors in large countries such as China (such as Alibaba and others). Interestingly enough, there is even buzz that that Apple (AAPL) will enter the market. After all, the company has integrated finger-print recognition technologies in the iPhone 5S.
To be successful, Facebook may need to buy a company. One possibility is Xoom (XOOM), which is a virtual money-exchange service. The market cap is only $684 million, and the company already has a strong global infrastructure.
Again, the WhatsApp deal may be at the heart of making Facebook a player in the space. But whatever the strategy, the fact remains that the market opportunity is massive — and is a perfect fit for mobile devices.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
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