Written by Jonny Fry
Writers linkdin: https://www.linkedin.com/in/jonnyfry/
WhatsApp was established in 2011 and, in February 2014, Facebook acquired WhatsApp for $19 billion in what was Facebook’s biggest purchase ever made - and remains one of the largest tech acquisitions in history. WhatsApp is the most popular messaging service in 100+ jurisdictions and has over 2.5 billion active users, having been downloaded over five billion times. In June 2018, Facebook shook bankers, including central bankers and governments, when it announced it was establishing an association (which included organisations such as Visa, Mastercard and Paypal) to launch a digital currency. Given Facebook’s 2.8 billion active monthly users, it has more than 3 times the users than the G7 economies’ citizens added together. Governments and bankers fretted that potentially Facebook’s Libra (now renamed Diem) could even replace their national currencies. So, surely it is of no surprise that WhatsApp is now looking to leverage its global distribution and begin enabling digital payments using its huge client base?
Considering this further, if you are running a business such as WhatsApp, or even Facebook, much of your management’s time is focussed on manging risks and endeavouring to reduce these risks for your shareholders. Therefore, if you are sitting on cash (this being over £85,000 in the UK - i.e. the maximum amount that is protected by the Financial Compensation Scheme) it is potentially less risky to hold your money in a cash-backed stablecoin compared to depositing the money with a bank. The reason is “fractional banking” - a practice not universally popular….
Fractional banking is almost 500 years old. It was widely used by London’s goldsmiths in the 1650s because they realised that the people depositing gold coins with them were all unlikely to require their gold back at the same time. Therefore, the goldsmiths only retained a fraction of the deposited gold and the rest, they lent. This practice remains the case in modern banking today. In essence, a commercial bank takes your deposit and pays, say 0.5%, to a depositor then lends your money to a borrower and charges, say 3.5%. - in simplistic terms, keeping 3% for lending out your money. However, in the event that the loans are not paid, it is your money, in effect (assuming the bank’s balance sheet is not strong enough or the government refuses to bail out the banks again), that could be at risk. Alternatively, you could, if you have sufficient cash, 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, i.e., “Please just look after my cash and keep it ‘ringfenced”. Another advantage of holding your cash in this way is that you know the bank cannot then lend to businesses that may not meet your own ethical/moral standards. The banks unfortunately will only be able to charge a fee of say 0.5% to act as a custodian, hence this is not as attractive for them but, understandably, arguably less risky for the depositor. The downside of this is, were all the large holders of cash to do this, where would the banks obtain the deposits in order to make loans? Who undertakes the role of lending if the commercial banks have no cash? Are we already seeing new lenders in the DeFi space with services such as buy now, pay later, which are growing massively?
But back to WhatsApp. If it starts to permit its 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, too, potentially enables Facebook to satisfy its ambition of reaching the unbanked which, according the World Bank, counts for 1.7 billion - with 66% of them having access to a mobile device.
The WhatsApp announcement is yet just another sign that the traditional banks are facing yet more competition, this time in their payments services. But then again, this is not new - after all, PayPal has been accomplishing this for a while and doing it rather well. Hence, it is capitalised at almost twice the value of Citibank!