Facebook-owned WhatsApp’s launch of its payments app in Brazil brings a potentially powerful new entrant to the global digital payments scene, one with a 2.0bn ready-made active user base (and access to an aggregated 3.0bn users within the Facebook family’s suite of products).
‘Facebook family’ monthly active users (bn)
Source: Company data, Tellimer Research. Note: Facebook family includes users of Facebook, Instagram, FB Messenger and WhatsApp.
This development mirrors the increasing convergence of messaging and payments we have seen in several Asian markets (notably WeChat Pay in China), represents a potential threat to the telco-led digital payments model that has dominated in Africa (notably Kenya’s MPesa) and follows-on from the launch of Facebook Pay in developed markets last November.
How will the app work in Brazil?
WhatsApp currently has 120mn customers in Brazil, making the country its second-largest market after India. WhatsApp payment transactions will be free to consumers but, according to TechCrunch, business owners will pay a 4% fee. This seems steep compared to M-Pesa's 0.5% charge to business owners in Kenya, bKash’s 1% charge (Bangladesh), Easypaisa’s c2% fee (Pakistan) and Visa/ Mastercard’s c1% interchange fee.
Currently, users need to link their payment accounts to a Visa/ Mastercard credit or debit card. Banco do Brasil, Nubank and Sicredi have been named as the initial partners (but we believe other banks will follow), while payments processor Cielo will also provide support. Over time, we think a service that does not require a user’s credit/debit card to be linked could be developed, to broaden the appeal of the service and bring in financially and digitally-excluded customers (this has been one of Facebook’s stated global goals, via its internet.org initiative, for example).
The service will link with the WhatApp business app, which allows small business owners to catalogue their products and services. WhatsApp has noted that there are around 10mn SMEs in the country. Peer-to-peer payments are also possible.
The launch of WhatsApp Pay could negatively impact some listed names, such as e-Commerce providers PagSeguro and Mercado Libre, if SMEs can bypass their platforms and transact directly with WhatsApp’s larger customer base. StoneCo, the cloud-based technology platform, could also be affected. Over the longer-term, as WhatsApp payments is launched across other markets (as per Facebook CEO Mark Zuckerberg’s comments earlier this year), there is also the real prospect of the platform having a meaningful impact on the global remittances industry.
Telcos seem ill-equipped to put up a challenge in Brazil’s digital payments space
With high levels of internet penetration in Brazil, widespread use of cards for digital payments and banks’ investments in agency networks, telcos have lagged banks in providing access to digital payments.
Telefonica’s Vivo, the telco market leader, announced in November 2019 that it was piloting Vivo Money, a service offering personal loans of BRL1,000-30,000 (roughly US$200-US$6,000) provided by Banco Digio and offered in partnership with digital lender Ibi Digital. Telecom Italia’s TIM Brazil has also signaled its intention to launch financial services by the end of 2020, in partnership with online lender C6 Bank. América Móvil's Claro Brasil announced a partnership to offer personal loans to pre-approved customers through Banco Inbursa Brasil.
However, with these initiatives at their maiden stages and being more lending-focused, together with the emergence of WhatsApp payments, we think it is unlikely that telcos will play a significant role in the development of the Brazilian digital payments sector.
India is likely to also be on the agenda for WhatsApp's payments service
India is WhatsApp's largest market, with 400mn registered users. For the past few years, the firm has been working on a payments service that would plug into the Unified Payments Interface, in conjunction with a range of banks such as State Bank of India, ICICI Bank, HDFC Bank, and Axis Bank.
Recent Techcrunch data places Google Pay as the market leader in Indian digital payments, followed by PhonePe and then Paytm. (Incidentally, we note that Paytm has moved in the opposite direction to WhatsApp, starting as a payments firm and then adding messaging functionality). However, none of these three platforms are comparable to Whatsapp in terms of the size of the user base. We estimate that the vast majority of India’s c500mn smartphone users have the Whatapp application on their phones.
We think the delay in Whatsapp’s roll-out in India may relate to regulatory difficulties. One of the key attractions for users of WhatsApp is its end-to-end encryption, which protects privacy but has drawn the ire of several governments, including India’s. WhatsApp has also come under fire for helping to spread false rumours, in some instances with fatal consequences.
However, the market clearly remains of interest to Facebook, as evidenced by its US$5.7bn investment earlier this year in Jio, the disruptive telecoms firm controlled by Mukesh Ambani.
What about Indonesia?
WhatsApp indicated last year that it was ready to launch a payments service in Indonesia and was looking for local partners (since digital payments operators can only be 49% foreign-owned).
Indonesia is Facebook’s fourth-largest market after India, Brazil and the US, and WhatsApp has over 100mn customers in the country. The firm’s interest in this market was confirmed with its recent investment in ride-hailing and delivery firm Gojek, a move that may give access to the industry-leading Go-Pay digital wallet. Provision of payments functionality to the firm’s users (whether on the Facebook or WhatsApp platforms) would immediately broaden the firm’s commercial opportunities in the country.
How does WhatsApp payments stack up against the global competition?
An obvious proxy for WhatsApp payments is WeChat Pay. Tencent-owned WeChat is a large messaging service with c1.2bn users. WeChat Pay has 800mn users and 50mn active merchants accepting payments. A key differentiator with WhatsApp is that WeChat has created its own ecosystem, using mini-programs, so that users do not need to leave the app to make use of a wide range of services such as ride-hailing, gaming, e-commerce and so on. China’s Alipay, with over 1.2bn users globally, has also created its own network of integrated products and services; over 80% of Alipay’s customers use at least three financial products from the company (ranging from payments, wealth management and insurance to loans)
However, outside of China, Facebook and WhatsApp are the clear dominant players in the messaging space.
Taking a broader view of the competitor space, and considering revenues rather than customers, Facebook is dwarfed by several players that are also looking to play in the digital payments arena.
Annual revenues for Facebook and selected peers (US$bn)
Source: Company data, GSMA, Tellimer Research
Low internet penetration and fragmented regulations will allow telcos to continue dominating in Africa
Turning to one of the financial inclusion success stories of the last decade, we note that Africa telcos have taken the lead in offering digital payments, anchored to the SIM toolkit. To bypass the issue of low internet penetration, these services have largely been delivered via USSD (ie text-based) rather than through applications.
GSMA estimates the number of internet users in Sub Saharan Africa to be 271mn. The potential scale of WhatsApp payments in Africa thus dwarfs current mobile money subscriber bases such as Safaricom's 25mn M-Pesa users, Airtel Africa’s 18mn and MTN Group’s 31mn MoMo subscribers. The ubiquity of the messaging service and the continued decline in the cost of smartphone devices make WhatsApp a potential disruptor for mobile payment services; it is the most dominant app across the vast majority of sub-Saharan Africa.
A successful launch of WhatsApp payments in Africa would likely require partnering with a bank with extensive cross border operations (such as Attijariwafa, EcoBank, Equity Bank Standard Bank or UBA) to service the largest possible number of customers across the continent in one go. Another option could be to work with the best financial sector partners on a market-by-market basis. However, neither of these options addresses the issue of Africa's low banking penetration. A third, albeit less lucrative, route would be for WhatsApp to partner with telcos, charging them for integrating their mobile money payments into the WhatsApp platform.
More broadly, we think that due to the generally low levels of financial access on the continent and the vast array of different regulatory frameworks, a pan-African digital payments network will not be easy to realise, particularly in the near-term. We therefore do not see much of a threat from this development for Africa telcos and their digital wallets.