FinS 🍲 for the Soul (22 Aug 2021): Facebook demands ‘fair shot’ for Novi payments & Ualá's $2.45B valuation
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1. Facebook demands ‘fair shot’ for Novi payments
Background: Facebook’s chief David Marcus published a blog in which he made an impassioned case for Novi, a crypto wallet. Novi allows individuals and companies to convert fiat currency (legal tender including notes and coins) to the Diem stablecoin (a currency that is pegged to the price of the US dollar) that could then be sent to others worldwide.
Recent development has seen the Diem stablecoin facing regulatory headwinds. As such, Novi is now exploring other stablecoin partnerships with Circle and Paxos.
Support has whittled for the Diem Association.
There is concern that Diem would compete with the supremacy of government currencies, and that it fails to address financial security, investor protection, and anti-money laundering laws. Furthermore, experts caution that Diem could diminish the role played by regulators.
Such fears of regulators are not unfounded. Holders of the stablecoin could lose trust in the digital currency and demand their money back. This could lead to a bank run. Earlier this year, Bitfinex, which manages the most popular stablecoin Tether that has $64B worth of tokens in circulation (more than the reserves of many US banks), had misrepresented the status of its reserves. The firm revealed that only 2.9% of its holdings were in cash, while the vast majority was in commercial paper, a form of unsecured, short-term debt. It had previously claimed that it was be backed 1-to-1 by traditional currency. The firm can now only assert that the tether is backed by a combination of traditional currency, cash equivalents, and even loans made by Tether to third parties.
Diem would be at least 80% backed by short-term government securities with low credit risk and 20% by cash. Quick liquidation of digital currencies without the backing of high-quality assets could destabilise the short-term credit markets.
US Treasury Secretary Janet Yellen pressed for a framework to regulate stablecoins in July. The Bank of England wants regulation for payments to be similarly applied to stablecoins. At present, most stablecoins are used for B2B payments and hedging and have not made an impact in day-to-day commerce.
The near future could witness the shift in the use of stablecoins from being a store of value to a medium of exchange. This shift creates an avenue for Facebook, with its 2.9B users, to assume the role of distributor of the Diem stablecoin, possibly altering the balance of the transactional role between stablecoins and fiat in the monetary system.
Conclusion: Social media giants such as Facebook have captured user engagement and embedded financial transactions within their ecosystem. For Facebook to be able to ride on Diem, the regulatory framework will need to consider the risks of relying on a single “too big to fail” tech firm orchestrating the metaverse, how to ease the entry of other credible providers and the collateralisation of stablecoins with high-quality assets. Without the above, the current political impasse would hinder the launch of Diem and the usage of the Novi wallet beyond fiat transactions.
2. Argentina's Ualá hits $2.45B valuation on funding round
Background: Personal finance management app Ualá has raised $350M at a $2.45B valuation in the largest private investment round ever for an Argentine company. The Series D round was co-led by Tencent and the SoftBank Latin American Fund, with participation from Goldman Sachs, Soros Fund Management, Ribbit, Greyhound, and Monashees.
Bringing all financial services into one app linked to one card. The company says it has developed a “complete financial ecosystem” that includes account management, card services, bill payment options, loan products, investments, instalments, and insurance. It has also launched merchant acquiring, enabling merchants to sell through a payment link or mobile point-of-sales.
Tapping into cash-based economies and enabling global payments.
While smartphone penetration has been high at 60% of Latin America’s 640M population, credit card penetration has been traditionally low at below 20% and growing less than 1% per year. In several markets, 70% of these cards are not enabled for international use.
50% of Latin Americans are underbanked and do not have access to financial services. They continue to use an array of different alternative payment methods such as bank transfers, voucher payments (e.g. Boleto Bancário in Brazil), instalments, local or regional credit cards, and mobile wallets.
Covid has accelerated the trend towards online banking. Brazil’s coronavoucher program and Merenda em Casa, Colombia’s Ingreso Solidario, and Argentina’s Ingreso Familiar de Emergencia all distributed financial aid digitally. Retail e-commerce soared 63% in the region last year and drove greater adoption of instalment payment methods. However, only 32% of total LATAM e-commerce spend is enabled through international credit cards.
Ualá plays strategically at the intersection of these trends. It offers a global Mastercard-branded prepaid card that fits Latin Americans’ cash-based preference and enables them to shop online internationally.
Grabbing market share in the region. Ualá plans to acquire Wilobank, Argentina’s first digital bank. It is amongst 52 neobanks that serve 18% of the LATAM’s population. With just 2.4M (5%) of Argentines being served by neobanks, Ualá has the runway laid out for it to ramp up the adoption of its solutions. Here are how some of LATAM’s largest neobanks compare:
Brazil’s Nubank - 40M customers. (Partners with Chubb. Offers digital accounts, international credit cards without fees, loans, insurance, and investments.)
Brazil’s Neon - 9M customers. (Partners with Banco Votorantim. Acquired Magliano, Brazil’s oldest broker. Offers digital accounts, debit and credit cards, loans, and investments.)
Brazil’s C6 Bank - 7M customers. (JPMorgan Chase acquired a 40% stake in it. Partners with TIM, a telco. Offers digital accounts, debit and credit cards, loans, and investments.)
Columbia’s Nequi - 6M customers. (Launched by Bancolombia. Partners with Finacle. Offers digital account, QR-code enabled digital payments.)
Chile’s Mach - 2.M customers. (Spinoff of Banco Bci. Partners with Mambu and EBANX, a digital wallet. Offers digital wallets and debit cards.)
Argentina’s Ualá - 2M customers. (Partners with Galileo, an API provider. Acquiring Wilobank. Offers digital accounts, debit cards, loans, insurance, and investments. Does merchant acquiring.)
Conclusion: Latin America is a difficult region to tackle with the populace’s aversion to digital payments due to fear of fraud and long-standing mistrust of banks. As Covid continues its rampant destruction with the third wave setting in, the region has a long road to recover. Hopefully, these neobanks will be part of a growing solution to increase accessibility in such a dark time as this.
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