It has only been a short time since the announcement of Libra, but an awful lot has already been written about its potential impact. Rightly so, too, as the successful introduction of a global digital currency would be a hugely significant development – potentially transformational – for the global payments industry. Whatever happens next, this should be another wake-up call for the banking industry on the costs of not moving with speed and ambition when it comes to innovation.
Speculation over Google, Apple, Facebook, and Amazon (the GAFA businesses) moving into the financial services space has been a hot topic in the industry for some time now, to the point where the discussion had become rather stale. Certainly, the attempts made to date by this group have all been rather underwhelming or withdrawn. Apple is perhaps an exception here, but even its latest Apple Pay incarnation still runs on top of the existing payment card infrastructure.
Libra is different for a number of reasons. Despite it being developed and shaped by Facebook, the intended governance structure will see a consortium of up to 100 partners taking decisions on the management and future direction of the currency. At the time of launch, 27 such partners were announced, including Mastercard, Visa, PayPal, Uber, Spotify, and Vodafone, highlighting the diversity of interested parties in its development.
In addition, the stated aim of Libra is to provide greater access to financial services to underbanked customers. Indeed, lowering the costs of cross-border remittances (which can be very fee-heavy) has been identified as a central use case, at least initially. It seems unlikely that this is where the ambitions end, and the presence of payment schemes, large merchants, and a telco in the initial list of partners also suggests that there are broader business models and plans under consideration. Facebook's reach into a global audience of 2.7 billion gives it a scale that few can match in this regard, making even a modest impact among its social media customers potentially very significant.
There is also new thinking here. One of the barriers to many cryptocurrencies being widely adopted for payments has been instability in the conversion rates to and from fiat currencies. To maintain a more stable valuation, every single Libra will be backed by a pool of assets. While this will not in itself prevent fluctuations in value, it should enable a high degree of predictability.
That said, there will remain some important challenges that must be overcome, and it is far from guaranteed that Libra will launch in its planned form in 2020. Indeed, it is not guaranteed that Libra will launch at all.
While the response from central banks and regulators has been broadly positive, the expectation is that any digital currency with the potential scale and reach of Libra will need to come under the existing regulatory frameworks surrounding payments – particularly anti-money laundering and KYC. This may slow or inhibit its plans for cross-border transactions. At the same time, severe political pressure is also being exerted, at least in part because of Facebook's recent challenges around data privacy and security.
On a more operational level, consortium-based approaches can prove difficult to move from concept to reality. The proposed 100-strong governance group for Libra brings with it some important benefits, not least around building a scaled ecosystem of users and payment acceptance. However, managing the differing business priorities and interests of a diverse group may well prove to be extremely challenging in practice.
The real message for the existing banking and payments industry is a simple one.
While a successful launch of Libra would absolutely represent a challenge to industry incumbents, what it really highlights are the consequences of not being bold when it comes to innovation and cross-industry partnerships. As we have seen time and time again, if banks and the payments industry are not able to solve the pressing issues faced by their customers, then someone else will look to take advantage.
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