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Aug 20, 2021 11 min read

Facebook's World Domination Strategy: Novi, a connected wallet for a connected world

facebook-novi-ft-rick-huckstep
Source: FT

Newsletter #28 (Premium): Novi is Facebook's digital wallet. It allows users to move digital money between Facebook's apps for free and easily. And it's is going to be hugely disruptive. You only have to look to China and WeChat to see what is going to happen.


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This week, Facebook announced the launch of Novi. Novi is the name of its digital wallet and is part of the Diem project.

This is BIG NEWS.

Because Novi will leverage the Facebook network of 2.7 billion users to provide a cheaper, easier and more convenient way to move money. In so doing, it will both increase the value of Facebook and drive even further usage from its global user base.

And, it will seriously upset the applecart and challenge the established (but slow and expensive) incumbent financial systems.

As nation-states grapple with how they will embrace the digital era and Central Bank Digital Currencies, whilst looking East and watching as China leads the way, Facebook sees the opportunity to establish a first-mover global advantage in the digital currency space.

Sending money as easy as sending a message

Today, the world is run on a network of financial systems that are slow, costly and silo'ed.

For the least well off in the world, these represent barriers to entry into their economy's banking system.

It is estimated that the number of unbanked globally is around 1.7 billion people (that's more than 1 in 5 of the global population without a basic bank account). And that's without counting the many more who are simply underserved by the existing systems.

facebook-penetration-unbanked-countries-rick-huckstep

These are people that have been left behind and left out when it comes to mobile payments, bank transfers and the like. They are stuck in a cash-only economy.

It was the goal of financial inclusion that proved to be a huge driver in China when they awarded banking licences to Alipay and WeChat in 2014. The Fintech revolution that followed had the effect of turning China into a (very near) cashless society. Read more about it here.

China: the journey to a cashless society
Central Bank Digital Currencies are coming. It’s not a question of whether, but when. And China has stolen the march and is years ahead of the rest of the world.

These old-world barriers are particularly obvious when it comes to moving money internationally, known as remittances or cross-border payments.

Even today, with all the digitalisation implemented across the network of financial systems, the average cost to consumers for moving money across borders is around 6-7%.

And it can take up to 3 days to move money across these systems, many of them designed in the 1970s and still in use today!

The issue is particularly acute in the United States where its payments infrastructure is "arguably the worst of any developed country in the world".

Meanwhile, China is building a digital trading and payments infrastructure for the 21st century. With trading systems exploiting the efficiency of blockchain technology and a CBDC (Central Bank Digital Currency) at the heart of its trading and payments ecosystem, aka the digital yuan,  China is light years ahead of the US when it comes to digital payments.

Building a financial system for the digital economy

The reality is that if the West was inventing a system today for moving "money" around, it wouldn't have started here!

Instead, today's financial systems would need to be defined as global (not local), open (not closed), interoperable (not proprietary), real-time (not batch), cheap (not costly), and compliant (like they are today).

We would design a system that enabled "money" to be moved around seamlessly. And where "money" could be coded to behave differently depending on different circumstances.  For example, take stimulus cheques, a blunt financial instrument where the Gov has no idea how the taxpayer's money has been spent once it has been posted to the citizen.

Image instead, sending the citizen digital money that was programmed with a smart contract that prevented the money from being spent anywhere other than, say, a supermarket or essential retailer, but not on scratch cards or Robinhood.

No Bank Account Necessary!

In the blog post from David Marcus of the Diem Association that announced Novi, Marcus said that Novi would be;

"an interoperable digital wallet that will enable people, and eventually small businesses, to move money around domestically and internationally in a quick and affordable way."

In simple terms, here's what that means.

A user puts real money into the Novi digital wallet. The real money is used to buy digital money, aka tokens, which in Facebook's case is called Diem, but it could be another digital currency.

(It's like going to a casino and buying a $100's worth of chips, with each chip being a token of value. Now imagine that instead of each token being a physical casino chip, they are a digital code that you can see, count and audit through your Novi digital wallet on your mobile phone).

Let's assume the currency is Diem for this explanation and pretend that $1 = 1Diem. You load $100 onto Novi and now have 100Diem.

Novi is from Facebook so you'll be able to access it from your favourite apps

Now you will be able to send a message on Messenger or WhatsApp to your family, friend, merchant, whoever and attach Diem to the message.

Let's say that you are in the USA and want to send $25 to me, here in Spain. With Novi, all you have to do is send me a message via WhatsApp or Messenger with 25Diem attached and this goes from your Novi wallet into my Novi wallet.

It cost nothing to send the message and was instant. A minute ago you had 25Diem, now I have it.

It's as though we were stood physically side-by-side and you handed me $25 of cash. Now we are virtually side-by-side and you have digitally handed me $25 of cash.

With the 25Diem in my Novi wallet, I can now send or spend that 25Diem WITHIN the Facebook ecosystem without any cost to you or to me. Everyone's Diems get moved around the Facebook ecosystem, being spent with merchants, or sent to family and friends, with no need to ever take it out of Facebook's financial system.

Once you see what is happening here, it is easy to comprehend how Novi would be massively disruptive to the US banking system, let alone the global payments and remittances space.

facebook-novi-digital-wallet-rick-huckstep

Overnight, Facebook would enable the 7 out of 10 Americans who use the platform to be able to send and spend money with only a Facebook, WhatsApp or Instagram account and a mobile phone.

It is estimated that the number of unbanked in the USA is over 60 million. Some can't get a bank account and some chose not to, for various reasons. But it's highly likely that many of them will have a Facebook account and a mobile phone.

Why would they ever need a bank account from now on?

In the same way that Amazon Marketplace is now the number 1 place to go to buy and sell stuff, Facebook's Novi would quickly become the de facto money platform, just as WeChat has become in China.

Zuckerberg's strategy is the Metaverse

Before we go into how Facebook is copying WeChat, first it's worth establishing some context.

CEO Mark Zuckerberg's strategy for Facebook is all wrapped up in this notion of the Metaverse. Around three years ago, Mark Zuckerberg posted a long article that set out his strategic vision for Facebook.

Called the Metaverse, Zuckerberg explained his vision for a fundamental shift from an open sharing platform to a network of private communications. (For more on the Metaverse, read Matthew Ball ...or wait for me because I'll be writing about it shortly.)

But this shift creates a challenge to the Facebook business model, which is totally dependant on an open sharing platform to feed the advertising revenues that Facebook runs on.

Zuckerberg's answer is to shift Facebook's business model into 3 areas;

  • the creator economy (where individuals use the platform to create value),
  • e-commerce (where Facebook becomes a marketplace), and
  • the "next computing platform" (aka mixed reality where virtual and augmented reality tech and AI enriches the human/machine interaction).

I tweeted this yesterday...

...it's a short video screen grab showing Mark Zuckerberg demonstrating Horizon Workrooms. Using the Facebook- owned Oculus Virtual Reality headsets, Zuckerberg has a virtual meeting with the host of the morning TV show in a virtual reality cartoon TV studio.

This is what Zuckerberg calls the "next computing platform".

Facebook is copying the WeChat playbook

Back to WeChat.

WeChat was the first platform globally to combine a social network with a payments system.  This did not escape Zuckerberg's notice.

“At first I thought WeChat was a little overhyped. It’s just WhatsApp for China, right? How good can a social network really be if it’s not owned by us? Then I linked my bank card and I was like ‘Wow!’ now I get it.”

Given this, it is no surprise to see that the Facebook strategy for Novi (and Diem) follows the WeChat playbook;

  1. Make it compelling to put money in
  2. Make it easy to move money around
  3. Make more and more reasons to keep money inside

This is what WeChat did back in 2014 when they first entered the digital payments space in China. WeChat took the tradition of the Red Envelope, where family members give each other money on special occasions and made it digital.

With the WeChat app, users could easily and cheaply gift money to each other. This was both a compelling reason to put money into the WeChat app, and made it easy to move it around.

WeChat then added more and more ways for users to spend money from the WeChat app, such as paying bills, doing the shopping, buying holidays etc. This encouraged users to leave their money inside the WeChat digital wallet.

wechat-digital-payments-rick-huckstep
Source: Visual Capitalist

The network effect took care of the rest. As more people started to put Yaun into the WeChat digital wallet, the value of using WeChat increased. And very quickly, the WeChatdigital wallet became the de facto alternative to handling cash.

The execution strategy for Novi

Facebook has told us quite a bit about their plans for Novi and the Diem project.

The first step is regulatory approval and it seems that these are nearly complete for the majority of states in the USA. The second is to integrate the Novi digital wallet across the Facebook family of apps, starting with Messenger and WhatsApp.

A key target market is remittances (the sending of money across borders). Late last year, Facebook introduced payments onto the WhatsApp platform in India.

India is the world's largest remittance market globally (c $79 billion pre-Covid). It is currently expensive at around 6% to send money home if you are an Indian worker, working abroad.

With Novi, the cost would be zero and the payment would be instant.

WhatsApp is currently the most popular messaging app in India. There are around 400 million WhatsApp users in India, which is around 30% of the population.

The last piece of the puzzle is the actual digital currency itself.

Since 2018, Facebook has been working on creating its own digital currency. Originally called Libra, the project was renamed Diem after it hit several major bumps in the road. Primarily in the regulatory space, where the concerns centre around Facebook, as a commercial entity, not a state-run bank, running and controlling its own currency. Which would be outside of the direct control of the Central Bank.

However, the Diem project continues to hit obstacles and the current understanding is that Facebook will use a stablecoin, such as US Dollar or Tether, as the cryptocurrency for the Novi digital wallet.

The advantage of using a stablecoin is it allows digital money to be moved around on a blockchain network (in this case the Ethereum network) without the risk of it becoming more or less valuable than the local fiat currency.


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What's a stablecoin?

A stablecoin is a type of cryptocurrency. It is a digital asset that is defined as "stable" because it is pegged on a fixed 1:1 relationship with a reserve asset like the US dollar or gold.

As a result, this significantly reduces the volatility of the cryptocurrency compared to all non-pegged cryptos. This stability means that the digital asset, or token, can operate on digital networks, such as Ethereum, without carrying the risk that their underlying value is hugely at risk due to trading volatility (or tweets from Elon Musk!).

One of the misnomers about cryptocurrencies is that they and their transactions are anonymous. This is often used as an argument against crypto because of its apparent suitability for money laundering, financing terrorists and criminals, busting sanctions, and avoiding tax compliance.

However, in reality, stablecoins and their wallets offer the potential for more effective detection and reporting of illicit activities than a traditional monetary system.

Crypto hacking is hard to get away with!
The Poly Network hack shows that crypto hacking is very hard to get away with

Can Facebook become the world's reserve currency?

Facebook has been in Payments since 2009. Across the last 4 quarters that have been reported, Facebook has enabled more than $100 billion in payment volume. They provide payments in over 160 countries and across 55 different currencies already!

In November last year, Facebook announced payments could be sent via WhatsApp messages in India.  Whilst this is a step forward for users, the underlying banking system is still the old one, with the same limitations and costs.

In fact, Facebook already provides the core features for the new vision of a Facebook enabled e-commerce Metaverse...but with real money and the cost and friction that goes with it.

As they roll out the Novi digital wallet, Facebook users will be able to move money around easier, quicker and at zero cost when compared to how they do it today.

It may seem far fetched, given that the USD accounts for around 50% of global trade and is, by a country mile, the leading reserve currency in global trade.

But it wasn't that long ago that gold was the world's reserve currency. In 1944, the USD was pegged to gold in what is known as the Bretton Woods system. Then in 1971, President Nixon removed that dependency and the USD replaced gold as the global reserve currency.

In the digital world, as Facebook enters digital payments with a currency pegged to the USD, is it really that unthinkable that one day Facebook, a private company not a central bank, could create an asset that becomes so ubiquitous and central to global trade that it replaces the USD as the world's reserve currency?


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SOURCES OF INSIGHT AND INFORMATION:


Zuckerberg, Facebook and WeChat, New York Times

Good stablecoins and digital wallets, David Marcus

Facebook ready to launch digital wallet, FT

WhatsApp User Statistics India, Findly

Mark Zuckerberg explains the Metaverse, The Verge

Send payments in India with WhatsApp, Facebook

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