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.”
This has been one of the most controversial expansions into finance in recent decades, with many possibilities and obstacles for Facebook to take advantage of and overcome.
Here's a rundown of Facebook’s Libra and Calibra, showing what they are, how they can dominate the open banking space, and note some major concerns brought up by critics.
Facebook’s new venture can be explained in 2 parts. Libra, and Calibra. Here’s a quick overview of both.
Libra is a digital currency, or cryptocurrency, that Facebook plans to release in 2020. Libra will offer all Facebook users accessto making financial transactions worldwide, instantly and without fees. While Libra is an interesting concept, the real impact to the banking world comes from Calibra.
Calibra is Facebook’s subsidiary and a digital wallet. This will be how people can access, buy, and pay with Libra. Calibra will be the backbone of Libra, determining how users will interact with the currency and dictating user experience.
However, Facebook doesn’t want Calibra to just be the portal to Libra. Calibra is being specifically designed so Facebook can add other financial services on top of the Libra currency. It’s with Calibra that Facebook can unlock the real power of open banking, and ultimately dominate the financial services space.
Facebook has connections with 7 million advertisers and 90 million small businesses. Calibra can quickly capitalize on this large sphere of influence and kickstart the venture into the financial sector through open banking. Through the use of open banking APIs, Calibra can capture and assist the customer segment who are still banking in the traditional system.
Open banking solutions are already commonly used by digital wallets to verify accounts. Calibra can use a service like Plaid to connect to user bank accounts. Furthermore, Calibra has stated they will use a KYC (Know Your Customer) check for users, which is done through open banking regardless to streamline the sign-up process.
Frictionless customer experience is a key component of making a product stand out from the competition. Calibra can use the information provided from open banking to personalize and streamline the process for customers. For example, Calibra can scan transaction history to add friends and family as “presets” on their app. Using the possibilities offered by open banking, Calibra can fulfill their promise of “sending money the way you send a message”.
As we mentioned in our blog on Open Banking Loans, the lending industry is ripe for disruption. Calibra can use these tips to offer personalized open banking loans to shake up the competition. Kevin Weil, Calibra’s VP of Product revealed in an interview that if the wallet proved to be profitable, Facebook could consider exploring other areas of finance. "If we are successful at providing a wallet that allows people to store money securely and send to anyone anywhere in the world, then over time we think there will be an opportunity to provide more financial services for people — you can imagine things like credit,” he added.
Another service that Calibra could look into providing are investment vehicles. The data offered through open banking can help Calibra understand a customer’s risk profile and provide personalized offers tailored to their situation. Open banking could allow Calibra to offer the best investor benefits at the lowest cost. When this is combined with their sphere of influence, it’s clear that Facebook can dominate the financial sector through open banking.
There are a multitude of ways in which Facebook could disrupt and dominate the fintech sphere with the help of open banking. However, it's not all hype - plenty of critics have voiced concern over Facebook's move into the financial sector.
After major fallouts like the Cambridge Analytica scandal and the $5 billion fine issued by the FTC, there are a lot of people who don’t trust Facebook. Privacy is important for customers, and with so many feeling violated, it’s possible that Facebook won’t have enough support to get Libra off the ground.
Scott Galloway, a marketing professor at NYU's Stern School of Business, expressed his concerns about Libra, saying that Facebook has betrayed user trust in the past and that the consumers could have "the mother of all negative unintended consequences if we let Facebook establish the new default currency."
Facebook first needs to rebuild trust in their user base so that people will feel comfortable with using Facebook as their financial institution.
Facebook is also facing criticism and opposition from central banks and regulators concerning Libra. This response is not limited to the US, with regulators from Britain, France, Germany, Japan, and Switzerland all concerned about the implications of a currency controlled by Facebook. For Libra to reach its full potential, Facebook needs to collaborate with and reassure global monetary regulators of the company's commitment to accountability.
Facebook has established the “Libra Association”, comprised of 28 companies such as Mastercard, Stripe, and Uber to oversee the currency. However, unconfirmed reports by the Financial Times suggest that up to three members are considering leaving amid the regulatory issues, with PayPal becoming the first company to withdraw from the controversial digital project on October 7, 2019. Facebook needs to handle these internal issues if they wish to expand and dominate the open banking industry.
Open Banking initiatives are leading the way as companies fight to provide consumers with financial services. Amazon Pay, Apple Card and Facebook’s Libra are all ways that Big Tech is planting its flags in the financial sector, and their influence is only growing.
Traditional financial institutions need to adapt to stay relevant in this rapidly evolving environment. Otherwise, they will be left behind as both Big Tech and startups dominate the open banking space, leaving them in the dust.
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