What does Libra from Facebook mean for banks?
One notable group of firms are missing from the initial Libra founding members: banks. So what could Libra mean for them?
Imagine a world in which billions of people replaced cash with Libra coins. These people today live in cash, prepaid cards or airtime minutes. With the exception of physical cash, banks benefit from those payment and account types. Physical cash has its limitations too, it is expensive to move around, easy to steal. Having a safe place to store and transfer money isn’t just inclusion, its freedom and its opportunity.
In the past decade mobile air time services from MTN Money, Airtel and of course M-Pesa have transformed hundreds of millions of lives. From 2014 to 2017, 515 million adults obtained an account, and 1.2 billion have done so since 2011, according to the Global Findex database.
The impact on the global economy has been astonishing. Once a community has a stable way to store value, micro savings and lending allow for property ownership and commerce to radically improve people’s lives.
The mobile operators have been at the front line of this massive inclusion, but it’s important to note while those mobile operators have gained massively from these money services, the banks have not been left out. Many banks have partnered either directly or indirectly service those telco’s. As such “mobile money” can be thought of as existing on bank’s balance sheets, eventually.
The case for Libra and financial inclusion
Despite all the progress there are still massive hurdles. There are 1.7bn people that are yet to benefit from financial inclusion. The Libra whitepaper notes of the 1.7bn, 1 billion have a phone but cannot afford to use mobile money services, lack valid ID documents or basic financial literacy.
To have “ID documentation” a person would need to visit a bank branch or telco store where identity can be verified. If you’re born poor, chances are you don’t have the government identity you need in the first place, and these locations can be hundreds of miles away from where you live. The chances of ever completing this journey are extremely limited.
Having a safe place to store and transfer money isn’t just inclusion, its freedom and its opportunity.
Enter, “blockchains”, which at least in principle have the potential to solve for creating digital cash and trustworthiness. How a specific blockchain does this is a debate for another day, but if we take as a given, a “blockchain like” system if designed right could operate a global digital cash system that was free at the point of use. Such a system would only require a mobile phone with data access and wouldn’t rely on government issued identities (much like physical cash).
IF (and that’s a big if), such a system could be built, that would be transformative for at least a billion people.
What happens to the telcos if Libra goes big?
The first thought is clearly the telcos may lose a major revenue stream if Libra were mass adopted. However, the reality is that in developed economies telcos largely provide handsets and data plans with traditional SMS fees now almost irrelevant. It’s likely if Libra did gain adoption, telcos wouldn’t lose their customers, they’d just lose a source of income.
Is Libra bad for banks?
In developing markets banks have almost no presence, but many have long seen the billions of people as potential future customers. Banks are held back by their need for physical branch infrastructure and reliance on paper identity. If Libra were adopted by communities instead of cash, banks may miss out on a potential billion customer opportunity.
These deposits rather than being captured as airtime (and therefore the banking system) would be captured by the Libra reserve, with Libra members benefiting from that deposit base. As many readers well know, banks make their money capturing deposits from one customer so they can lend that up to 10x more customers. A deposit pool is a great way for banking groups to expand their balance sheet.
Without deposits a bank can’t lend. If deposits fly away from banks, into Libra wallets. Well. Things could suck.
In developed markets the picture is less clear. Libra as designed is aimed much more at the unbanked, but its initial founding members are nearly all major western payments companies, tech companies and merchants. If Libra works (even vaguely) as designed and is adopted in any major way, you could imagine a world where customers hold Libra in WhatsApp, Instagram or their Calibra wallet, instead of money in a traditional bank account.
Banks may miss out on a potential billion customer opportunity
It sounds a little mad on the face of it, but given how low interest rates have been for the past decade, there is almost no benefit for most of us holding our income at a bank. Why wouldn’t we hold at least a portion of our income in Libra? Particularly if our friends, or favourite merchants are using it and we transact within that platform, or platforms, using Libra. Out with friends? Here’s Libra to cover a meal, transacted via WhatsApp.
Perhaps the pinch point is neither developed, nor developing economies, but the emerging markets in the middle, like India, Indonesia, Vietnam and many more. Where banks have some presence, mobile money has a presence, tech giants have a presence, but Libra could be a cheaper and easier to adopt alternative, because it is ‘cash like’.
The barriers to adoption would be far lower. Banks could see the flight of deposits away from bank accounts, prepaid cards and telco airtime minutes to Libra wallets.
How realistic is this? It’s too early to say, but have another look at the list of companies involved with Libra and the chances can’t be zero. The scale, the reach, the expertise, it’s all there, in the Foundation.
What everyone is missing: lending
Where Libra gets much more interesting for me is not the cash like system, nor even it’s tech and economic model (all of which are by Facebook and it’s partner’s own admission still a work in progress). For me it’s lending.
Of all the partners Libra announced,Kiva stuck out to me. Why? Because Kiva is a 503c non profit that lends to the 1.7bn unbanked people around the world. They operate in 76 countries and have a 96.9% repayment rate. Try not to get blinded by the initial partners, or our bias to North America and Europe. This could be far more transformative in markets where lending isn’t prevalent today.
So should banks panic about Libra?
Panic? No, but I’d look seriously at this infrastructure.
I don’t think Libra will see many banks join until regulators have gotten a lot more comfortable with it, but that doesn’t stop banks figuring out, can they lend through Libra? What risk models can I build on a blockchain that allow me to deploy lending globally? Who are the partners in this space?
Oh, and if Libra does get built, what will you do if there are no more deposits and Libra gets access to central bank money? Well, by that point it may already be too late for entire service lines.
In previous blogs I've examined if Libra is a Facebook data ploy and why regulators have reacted so strongly. If you want to know even more, we've discussed the topic in great depth over on Blockchain Insider Episodes 101 and 102.