Facebook's Libra is a new global digital currency that will allow the billions of Facebook users to make financial transactions on a global scale. The move, however, has been met with widespread lawmaker concern and is feared to have the potential to shake up the world’s banking system. In this article, we will focus on how Facebook’s Libra (and its wallet Calibra) can leverage open banking standards to their user advantage.
Disclaimer: This is a creative piece on how Facebook could use open banking. We currently have no information on Facebook’s plans or intentions of using open banking.
Open banking was designed to improve customer experiences and foster competition within the financial service industry for more diverse and competitive financial products. Already adopted by global banks and lenders, open banking provisions that sharing financial data in a securely open way will benefit the institution, the third party service operator as well as the consumer. OpenBanking - the UK's official service regulator currently lists137 official regulated providers that can offer services using open banking.
Libra itself won’t have much to do with open banking the same way that other fiat currencies are not affected by the UK banking regulatory standards. Calibra - Facebook’s Libra cryptocurrency wallet, however could leverage open banking possibilities for the customer segment already banking within the traditional system. The digital wallet that users will be able to use for storing, exchanging and paying with Libra from 2022 onwards will be available in Messenger and WhatsApp, as well as in a standalone app.
A sneak peek at what the experience of using Calibra will be like. Source: Facebook Newsroom
In their statement, Facebook ensures that Calibra will “be using all the same verification and anti-fraud processes that banks and credit cards use,” while also taking steps to protect your privacy.” Open banking standards can help Facebook deliver on these commitments.
Other digital wallets are already using open banking solutions to verify user accounts. For example,Venmo uses Plaid to verify user accounts so that payments can be made directly from user’s bank accounts.
User identity verification
Facebook has mentioned that Calibra will perform KYC (Know Your Customer) checks for each new user. To perform this check, Calibra can leverage the information that customers already submit to their bank when signing up for the service, namely their name, last name, address and other details.
User on-boarding and personalisation
Facebook probably knows better than any other company that high conversion rates are directly supported by a smooth and nearly seamless customer on-boarding. Depending on user interaction with their traditional bank account, Facebook could customise their experience with Calibra. For example, it could quickly scan their bank transaction history to identify frequent payments made to friends and family and add them as “presets” to their Calibra app.
Facebook has hinted that offering credit through Calibra is a possibility. If it does make the move, Calibra will run into the same problem that many international lenders are already facing - thin-file clients. Calibra will be international from day one, which means that Facebook won’t be able to rely on traditional credit bureaus. To offer a truly scalable credit experience, Facebook will most likely have to follow the modern digital banks and lenders that base their credit evaluation processes on open banking data.
Facebook’s Libra initiative has been a highly controversial venture since the beginning and will endure more scrutiny further on. It’s clear, however, that the race for user hearts and wallets will be won by the service delivering the biggest user benefits with as little friction as possible. And that’s what open banking is all about.
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In recent years, tech giants like Apple, Google and Amazon have started planting flags in the financial sector, intruding on traditional financial institutions. Facebook is finally joining the race with Libra, its digital currency described as a “simple global currency and infrastructure that empower billions of people.”
As a society, we are gradually moving away from paper cash, increasingly gravitating towards alternative digital payment methods - contactless-cards, cryptocurrency, mobile and wearable technology. Regulatory driven initiatives like EU's PSD2 and UK's Open Banking are propelling financial innovation and enabling the emergence of new products and services.