Payments Will Be Facebook's Regulatory Waterloo
Facebook has had quite a run operating in the completely unregulated, wild world of social media, finally ending with a mea culpa that it needs government regulation in order to manage the massive social and democratic disorder it has created. With its new Libra cryptocurrency, Facebook wants to disrupt the most highly regulated industry on the planet: the payments and transborder payments markets.
In recent years, startups have made a habit of taking on regulators in order to grow, with Uber and Lyft as the posterchildren. Playing cat and mouse with much-hated, local regulators like the Taxi and Limousine Commissions of various cities and countries proved easy fodder in many jurisdictions and Uber and Lyft are now multibillion dollar public companies.
However, once startups aggressively step into highly regulated industries like insurance or healthcare, regulators come down on them hard. The once high-flying Zenefits was kneecapped by various state insurance regulators and never recovered.
When companies apply to enter highly regulated industries, regulators are typically looking at intentions and previous compliance, consumer benefit, and capability.
Intentions and previous compliance
When companies attempt to enter new highly regulated markets, regulators typically look at the company’s intentions and previous compliance. Facebook has a long history of willful neglect of their consumers’ privacy, as evidenced by numerous disclosures, including a document seizure by the United Kingdom’s parliament. Facebook also has a long history of obfuscation, as studiously documented by my former CBS colleague Jason Kint, now the CEO of the privacy organization Digital Content Next.
A company that willfully ignores parliamentary subpoenas and document requests -- like Facebook has done in countries ranging from Canada to the United Kingdom -- cannot expect to get a welcome reception when calling in those same countries on the regulatory authorities that regulate new entrants into tightly regulated environments like payment systems.
In an attempt to augment its reputation, Facebook has of course signed up an array of partners, ranging from processors like Visa and MasterCard and existing payment systems like Paypal. Including companies like Uber that grew by breaking regulations in the consortium does not help the cause. Noticeably absent are the large banks consumers are currently using to manage their payments and handle their cash. The consortium would have been far more powerful if Chase, HSBC, Wells Fargo, RBC, and other large banks had participated.
When weighing the risks of a new payment vendor or system, regulators are looking to weigh the risks against the benefits for consumers. The vast majority of consumers are not foreign exchange traders and do not understand “currency baskets”. They want to put their local currency such as US Dollars into an account, see the exact amount of US Dollars in their balance, and then spend their US Dollars for something that is priced as US Dollars.
There is zero benefit to the consumers of developed countries of storing money that is meant to be spent online as basket of currencies. Of course, a claim can be made that the Libra system will help the “unbanked”. However, regulators are currently evaluating a variety of new options for the unbanked, and will be quite skeptical at permitting large institutions to target unsophisticated consumers with the type of multi-currency store of value typically targeted at highly sophisticated investors and companies hedging their international sales.
The regulators of developing nations will need to evaluate whether having their consumers understand and use a basket of currencies will be more useful than using their own local currency. Currently there are numerous very efficient and cheap mobile banking solutions for developing nations that have achieved wide adoption.
Related: The Murky World of Cryptocurrency
Facebook has hired very smart people like David Marcus, the previous President of Paypal, to figure out how to build a new payment mechanism using cryptocurrencies. Marcus definitely understands the payments market, but has never previously set up a new payments system from scratch.
It is actually not that technically difficult to send money from one place to another. The payments market is tightly controlled to know exactly who is making the payments and what happens when things go wrong.
In the payments industry, there is currently a huge focus on “Know Your Customer,” so a payments operator can prove they made a best attempt to prove consumer identity before a payment account can be set up. “Anti-Money Laundering” (AML) consumes vast resources to ensure that illicit money from the illegal drug trade or to fund terrorism are not funneled through digital payment mechanisms.
Payment operators must ensure that they comply with dispute resolution rules in each market, which requires customer service operations that retain all customer communications. And finally, payment operators are subject to intense information security requirements to ensure that there are no breaches or malfeasance.
Facebook should pivot back to fixing its core business.
Facebook has some great concepts in Libra, including significant consumer privacy features and a consortium to drive platform decisions. Facebook should consider adding privacy and decentralization to repair its social media business, rather than to try to “disrupt” the highly regulated payments industry.