Why Facebook Should (And Probably Will) Buy TransferWise?

This week, the newsfeed was booming for A16Z’s lead in the $58M round in Transferwise. According to Ben Horowitz, now joining the board of the fledging payments transfer company, he was righting a wrong by investing years after he first passed on the opportunity.

I love TransferWise — I believe it is brilliant, not only because one of the founders is Skype’s first employee (I did work for their first investor, Morten Lund, for a while) and we share the same MBA experience form INSEAD, but also because the idea is brilliant, simple, and it just works.

So how exactly does it work? Simple. Imagine only 4 people in the world — two in the UK and two in Estonia. One of the UK guys wants to send GBP 100 to Estonia, while one of the Estonian guys wants to send the equivalent of GBP 100 to the UK. Instead of moving the cash across borders, the second Estonian (the one supposed to receive the cash form the UK) will get the equivalent in his home currency, while the first Britton will ‘send’ his cash to the one supposed to receive money from Estonia. Accounts are clear, exchange rates are favorable, everyone is happy.

Now let’s turn to why I believe Facebook should (and potentially will) buy Transferwise. 3 things. Nice and easy.

1. Facebook Needs A Smart Payments System

Ever since hiring David Marcus from PayPal, Facebook has taken steps to make payments work — by integrating with Braintree and Stripe, it kind of moved in that direction, but the most significant maneuver was to unbundle Messenger from Facebook, which allowed it to build the right payments security (PCI) within the now singular app. With 500M MAUs, Messenger is in the top 10 of most downloaded and used apps in the world and it needs to get to a stage where Facebook users are able to safely and easily transfer money among themselves, of course, for a small fee.

Buying PayPal, soon to be spun off from eBay, is not necessarily a step in the right direction, as it will take a while to move all these e-mail address linked accounts to Facebook connected ones. Stripe could be an option, but it is not peer-to-peer yet, so it is not a match for what could be coming from Messenger.

2. Facebook Has What TransferWise Needs

Transfers across borders are just that — money across borders. So, in order to build a significant and satisfied user base, TransferWise needs to ensure that the money flow between countries (or, in a twisted way, across multiple countries) kind of cancels out. In our original example, they need to make sure that amount of cash Brits want to send to Estonia equals the amount of cash Estonians want to send to Brits. That’s hard. Money flows, outside of the friendly lending sum, especially the ones TransferWise is after is probably mainly focused on the huge market of remittance, where millions of dollars cross the borders from rich countries to poorer ones, where relatives get support from their families lucky to earn good wages approved.

The Economist ran an article a few years ago to cover that crazy market (picture from the article) and the size of it is staggering.

Now — clearly, developed markets will have more adoption of TranferWise initially, so the match on the other side of the fence needs to grow consistently with the desire to send funds from one country to another. That’s probably where the $90M funding to date has gone and is going. If there’s any company in the world that keeps friends and family connected and communicating every day, that is Facebook. If Facebook buys TransferWise will hit the right size, where people who previously used Western Union and regular bank will be able to send money to each other with a simple click of a button and a nice Thumbs Up (We all like it, easy). Or WhatsApp, which will reach 700M.

3. TransferWise Has What Facebook Needs

Listening to Facebook’s earning’s call from a couple of days ago, it was a delight — best ever quarter, great growth, mobile now 66% of all revenue. But, payments, mostly from desktop games, are declining (remember Zynga?), and marketing dollars are not all the time with established brands, but still based mostly on VC-backed companies marketing their apps. Add to this Google’s 89% from ad revenue, which might be slowing down, and then we see that the light hand of the genius contributor to the Economist might have said it best:

"But what is perhaps most striking about the big four [Google, Amazon, Facebook, Apple] is that Apple, the most successful - it is now the most valuable and profitable public company in history - has the most old-fashioned business model. It sells desirable physical objects at high margins, using data chiefly to bind customers into its ecosystem. It makes its money from shipping atoms, not bits. (emphasis added)."
The Economist Espresso, January 29th, 2015.

Here’s the story — Facebook needs to start becoming an e-commerce platform for not only P2P payments, but also payments to stores and companies. The so-called push into personalization has not really happened, not at least from the perspective of the seller — yes, a seller might target the right demographic with the right device, but it is yet to be proven whether Facebook can offer a special deal to a single person only, based on their personal information.

So, overall, it seems like a match in heaven — Facebook needs its payment solution, ideally as a P2P, while Transferwise can use the scale to make sure the business model is successful.

One more thing — the VC angle

A16Z’s late stage investment might not be a coincidence. With tons of money into their funds (a total of $4Bn), A16Z needs to dispose of it relatively quickly and in big chunks — it is unlikely that 4,000 transactions of $1M seed is possible and looking for that startup to make you the 100X might be long gone, given the size of the fund (Not that it will disappear, but logic dictates it is better to get a few mega-rounds with a solid 3–4X return, than multiple, looking for the unicorn). Additionally, it is not uncommon for A16Z to invest in companies that eventually become acquired by Facebook — Wit.ai, Oculus Rift, Instagram are just good examples. Some, such as Oculus Rift, received an investment from A16Z just 3–4 months before Zuck bought it (To be fair, Yahoo seems to have bought more investees of A16Z). So, are we seeing a late stage round that might soon turn into a good return after Zuck decides that it is the right time for payments?

*** Expressed views and opinions are my own. Disclosure: I do believe that The Hard Thing About The Hard Things is probably one of the best business books I have ever read.