Why Facebook is launching its money transfer service in Europe, not the US

By Tim Worstall , written on April 15, 2014

From The News Desk


The Financial Times has the news (the, err, sorta confirmed rumor) that Facebook is about to launch a money transfer program over here in Europe. Given that money transfer is a proven money maker if you've got a large enough network doing the transferring, the thought that Facebook wants to get into it isn't all that surprising.

But why in Europe and not in the US?

For that we have to look to the regulatory regime that covers such services. Contrary to the idea that Europe is festooned with regulatory barriers to new ideas and entrants into markets, there's good evidence that, at least in some sectors, those barriers are very much lower here than the are in the US. Says the FT:

Not content with being just a platform to host cat photos and status updates, Facebook is readying itself to provide financial services in the form of remittances and electronic money.

The social network is only weeks away from obtaining regulatory approval in Ireland for a service that would allow its users to store money on Facebook and use it to pay and exchange money with others, according to several people involved in the process. The important word in this process is "passporting", making the European Union regulatory regime work in an entirely different manner from that in the US. We had a look at that US process a little while ago here at Pando including this quote from Aaron Greenspan of Facecash:

One by one, states were passing versions of the money transmission statute. The result is that five companies — Western Union, MoneyGram, Travelex, Sigue Corporation, and American Express — have effectively limited competition for pricing of financial services.

The laws were far more effective than envisaged, however, shielding Visa, MasterCard, Discover, and the entire banking system from new entrants and new technologies. The laws imposed licensing requirements so high, and so vague, that effectively the only companies able to afford compliance were his clients. In California, I was told by the relevant authorities that unless I could come up with anywhere between $2m and $20m, the DFI would call the sheriff and throw me in jail, and that my questions about the MTA made it sound an awful lot like I “intended” to break it. Each European Union country (all 28 of them at present) has its own version of the money transfer rules, What you've got to do in order to show that you're not allowing money laundering, that it's not drugs money being fed in at one and to be pumped out as nice clean electronic money at the other, tax records that must be kept, security, what proof you have of your own and the network's financial stability and so on.

These also exist in the myriad of languages that we Europeans speak and grunt. So there's no a priori reason to think that that regime is going to be easier to navigate and that's where this passporting comes in. If you qualify under any one of those 28 regimes then you are, automatically, cleared to work in all of the 28 jurisdictions. The basic contention being that while the systems might be different at times they're all just methods of getting to the same desired goal. So it doesn't matter which of the 28 regimes is being used to regulate you: all are equally effective at making sure that you're doing everything responsibly.

This is entirely different from the US regulatory regime where each State does indeed have its own systems. But you can't rely on having been passed as fit by Delaware to ensure the legality of your operation in California. So, in the US you've got to fight through each and every thicket of contradictory State regulation, 50 times in fact, whereas in Europe you've only got to do this once.

So, if you were going to try and launch a service in this sort of heavily regulated area you'd probably be better off trying to launch in the European Union first. Then you can see how it goes and make up your mind whether the extension of it to the US market is going to be worth the bother of having to deal with the Mickey Mouse regulators in each and every Statehouse.

This is in direct contravention of why I think (no proof, just prejudice on my part) social networks launch better in the US. To the limited extent that inner Detroit and Salt Lake City actually do share a culture you can launch across three hundred million people that all have a common culture and language. Something that's really not possible in the EU (and Poland and Portugal are much more different than any cultural or social differences within the US) given the diversity of both here. However, where there's that portability within the regulatory structure over here then the EU does become a more attractive playground to test out services that might be anywhere from constrained to strangled by trying to deal with the differing regimes of 50 States.

It's worth a thought for all start ups in these sorts of regulated industries. If you're facing that State by State regulatory problem in the US, have a look at the EU. You'll almost certainly find that portability of regulatory oversight means that over here you've only got to fight one bureaucracy, not 50. At the very least it will be cheaper to road test the idea even if you do then have to come back and fight the hydra headed monster eventually.