Facebook Might Be Planning a Very Smart Pivot

A banking license? For a social network? Here’s why Facebook’s latest move is more forward-thinking than it seems.

Facebook wants to bank its financial future on more than online advertising. In fact, the company wants to become a bank.

According to the Financial Times, Facebook is awaiting authorization from Ireland’s central bank to become an “e-money” institution, which would allow users in that country to store money on the site and make payments to individuals throughout Europe.

In addition, Facebook has allegedly been in discussions with some startups in the international money transfer business, including mobile solutions.

Is this a smart move or a desperate pivot à la Google Glass? Probably a bit of both, and that offers a lesson for entrepreneurs.

A Little Bit Desperate…

On one hand, things are going well for Facebook. Revenue in 2013 was up 55 percent over 2012; earnings climbed by more than two-thirds. By the end of the year, monthly active users were up by 16 percent.

And yet, all is not bright. Pressure on advertising rates continues to squeeze companies. Google got punished in its earnings call the other day, even with 19 percent year-over-year growth. Aside from questions about the wisdom of Google’s acquiring and then selling Motorola, the true issue was the price of ads. Even as the number of paid ad clicks climbed last quarter compared to 2013, the average price per ad dropped by 9 percent.

This particular story has been ongoing for some time. Google is getting more thoroughly into mobile ads, where prices are lower because they don’t seem to do as well for advertisers. And regular ads are getting less expensive, as smarter ad buying, alternatives, and other factors keep the pressure up.

Yahoo just saw a similar pattern. Even though Wall Street was delighted that revenue for display ads was finally up 1 percent instead of down single digit percentages or more, the story was volume was up 7 percent, while price per ad was down by 5 percent.

The people who run Facebook aren’t stupid and they can see the industry trend. Sustaining the growth that its investors expect will only get tougher so long as the price for ads continues to drop. Plus, its user expansion comes in regions where the ad revenue per person is a fraction of what users in the U.S. and Europe generate.

But Also Pretty Darn Smart

That’s the desperation. Now for the smart move. Facebook has continued to become stronger in mobile. The basic premise for a smart business pivot is the rough opposite of the “innovator’s dilemma,” Clayton Christensen’s concept that when companies become big, they get too dependent on their once disruptive, now cash-cow products and services. Management goes into denial over potential new disruptions that could tear their business apart.

In the smart business pivot, management looks at disruptive forces and recognizes that it may have to cannibalize its current strategies to avoid being made irrelevant. Just as importantly, though, the company looks for new opportunities in the disruption.

Facebook sees the wave of disruption that mobile offers. It has undertaken various attempts to make its mobile software more attractive to both users and advertisers. Facebook even tried to push a software package that would effectively make it the top screen on Android phones, though it found little interest.

What Facebook does have is a massive number of mobile users. The question now becomes what else these users might want. Payment systems have become a standard answer. And payment card companies, banks, telecom carriers, electronic payment systems such as PayPal, online conglomerates including Google, and others are all trying to get into the game.

However, Facebook has an enormous advantage: relationships with well more than a billion consumers globally. It effectively overcomes the serial balkanization of hardware vendor, operating system, and wireless carrier.

And as Leonid Bershidsky writes at Bloomberg, it may be that Facebook is aiming at the developing world:

Facebook has about 100 million users in India. One can send the euro equivalent of $200 from Germany to India for $1 in a matter of days using a London startup called TransferWise, set up by Skype’s first employee Taavet Hinrikus and another Estonian, Kristo Kaarmann. Facebook might be able to improve on that by guaranteeing instantaneous transfers, and perhaps by offering lower prices, because it is so huge. Facebook is reportedly talking to TransferWise and its peers about some kind of partnership.

Bershidsky argues that Facebook would have to enter the remittance business to get cash to people. Perhaps–though in the last quarter of 2013, the company had a total of 1.2 billion monthly active users, with 368 million of them in Asia. If you have enough people already using your banking service on smartphones, do you necessarily need remittance businesses to hand cash to people? (However, it likely would make the overall business more effective.)

The point for entrepreneurs is that no business lasts forever. What can continue to thrive are relationships with customers. Focus on them and keep asking how new technology might let you provide even more value. That’s the way you keep a business going.

Lifestyle guide: be a cashless society with Mandiri E-Cash

This new payment method from Mandiri Bank, one of the largest government-owned banks in Indonesia, is going to be a new favourite. I think the Indonesian market is ready for this. It’s calledE-cash, which means that your cash is in your phone. If you have a phone, either smartphone or feature phone, you can use Mandiri E-cash, even if you are not a Mandiri customer yourself.

We noted recently that Indonesia has low e-banking penetration with debit card penetration just hitting 11 percent. The society tends to favor cash-on-delivery and other payment gateways that require cash.

Branchless banking system

E-cash wants to solve this problem by creating a branchless banking system. This works similar to WhatsApp banking, where you use your phone number as your account number.
First, the user registers on the E-cash smartphone app1 or through Mandiri SMS (*141*6#) from a feature phone.

Top-ups can be done through a Mandiri ATM (using Mandiri or other partnering banks’ debit cards), Mandiri SMS (*141*6# from your phone), Mandiri’s website, Mandiri Clickpay (only accessible to Mandiri customers), money transfer, or at retail shops.

Welcome to cashless payment

In the app or through Mandiri SMS, E-cash can be used to buy phone credits or electricity vouchers, shop online, and even for physical transactions in stores. Money transfer and cash withdrawal is also available to users who upgrade their accounts for free.

As a payment gateway, users will receive an OTP (one time password) after they input the amount of payment. This OTP is given to the cashier (physical store) or to the website (online store).


Another local bank, CIMB Niaga, used the same concept this year with Rekening Ponsel. The difference between these two is that E-cash can be used as a payment gateway for online and physical stores, while Rekening Ponsel can be used for utility and internet bills, plane tickets, credit card installments, etc.

Retail shops as a third party

User can top up at retail shops by depositing cash at the cashier. Any retail shop can register itself to partner with Mandiri. I asked for the list of retail shops so far, but Mandiri isn’t disclosing the data yet.

This third-party system (or “Unit Perantara Layanan Keuangan” in Bahasa) is still in a trial phase in cities outside Jakarta because the number of ATMs is fewer. The trial takes place in Bandung, Cirebon, Indramayu at West Java, Ogan Komering Ilir and Ogan Ilir at South Sumatra.

-Courtesy: Techinasia