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Facebook’s Libra is a potentially disruptive proposition with many open questions about how it would actually work. However, there are several things that make this proposal quite different to the analogues we’ve seen before:
Ecosystem: This is not a go-it-alone solution. The remarkable collection of 28 partners and erstwhile competitors including Visa, Mastercard, PayPal, eBay, Uber, Spotify and Vodafone could provide for massive scale. There’s a target of 100 partners by the launch scheduled for 2020.
Each partner is investing up to $10m and providing access to technology, payments and regulatory expertise and significantly, near immediate scale (>10 billion individual customers (aggregated).
We’ve rarely seen such global cross-industry collaboration in payments, with notably no banks at this stage. This may well change if Libra proceeds.
Adoption/Acceptance: The proposition faces a two-sided market challenge of user adoption and merchant acceptance. Getting people to sign up to a new digital wallet and fund it will be a hurdle. But with Facebook’s 2.4 billion active users and Visa and Mastercard apparently committed to enable Libra with their 50 million+ merchants, the preconditions are there. It just needs to be easy for both to adopt and use in practice.
Market/user need: This is explicitly a global play. While it may be less relevant to customers in markets with diverse alternatives, it could be very relevant for the world’s two billion unbanked.
Also the real-time, low-cost ‘borderless’ nature of the proposition, makes it very attractive for international payments, which currently incur significant costs (~2-10%). Its potential is for B2B and C2B markets, especially for SMEs and individuals making remittances.
It’s worked in China: Although Libra may not be so needed in developed markets, WeChat’s low-friction integration of payments capability into its ecosystem helped China achieve more than 80% mobile wallet penetration. If Libra’s payment flow and integration of digital wallet services removes the friction of having to enter your credit card details for many electronic payments transactions, the offer could be relevant to customers anywhere.
Technical advantages: Most nations’ payments infrastructures grew up as independent systems loosely connected by the correspondent banking network (ie, SWIFT), which can be comparatively slow and high-cost. The technical details are still not finalised, but Libra may promise a low-cost, near real-time and fast (1000tps vs. Bitcoin’s 7tps) global payments infrastructure. If the proposal is able to deliver safe borderless clearing and settlement it could be transformational, even if it’s just a new payments infrastructure.
This is not Bitcoin: It is designed as a permission cryptosystem to enable secure global clearing and settlement capability. But unlike other solutions the underlying token, it not free-floating (like Bitcoin) or pegged. It is instead a 100% collateralised stable coin based on a basket of currencies and securities. This means that the value of Libra will not fluctuate wildly like Bitcoin, effectively removing FX exposure for users and making acceptance much more palatable for merchants.
Regulatory: Perhaps the biggest initial challenge. The Libra white paper clearly recognises the importance of compliance and indicates that the endpoints (e.g. the wallet providers) will be incentivised/required to address the Know Your Customer / Anti-Money Laundering (KYC/AML) legislation. But there is a tension between compliance and making it easy for potential users to buy into the ecosystem. Let’s see how this works out.
There have been concerns raised about privacy, consumer protection and the potential of Libra to become a privately-issued alternative currency. The US Congress has asked for a moratorium until politicians can assess it.
Governance: Some concerns can be assuaged given Libra will be open-sourced and governed by the Libra Association, which includes trusted and experienced financial service providers (e.g. Visa, Mastercard, PayPal etc.). Governance arrangements are such that each member can only have up to one vote, mitigating the concentration of power.
Security and privacy: Facebook has also set up an independent, regulated subsidiary (Colibri) to manage its services, promising no intermingling of user data to protect privacy. Security will be a key focus, but having experienced providers playing key roles and by setting Libra up as a permission, pseudonymous system where participants need to meet a high bar (e.g. >$1bn in market value, $500m in assets and/or 20 million customers) will help to mitigate this. Much will depend on how channel partners and wallet providers ultimately handle KYC compliance and customer/transaction/merchant data.
Implications: Libra presents many opportunities but has potential challenges to manage. It is too early to tell if they will be successful, but clearly, Facebook and its partners are betting big on being able to do this.
Financial institutions could also play important roles such as validating transactions, providing digital wallets, or ensuring regulatory compliance. Libra could potentially also support a global digital identify or KYC framework, which would aid banks and regulators with AML/CTF compliance.
If the association can navigate the regulatory hurdles, a global low-cost, low-friction, payments system that integrates easily into various channels and platforms could result.
Richard leads Deloitte's Financial Services Payments practice nationally. He has 20 years experience working with start-ups, payments service providers and financial institutions on strategy development and execution. He has helped organisations across North America and Asia Pacific with projects relating to cards, mobile banking, M&A, regulation, process improvement, EMV, new product development and digital/mobile payments.