Facebook Libra – Saving gravy.

Vested interests sink Libra.

• There are certainly regulatory issues that need to be addressed with Facebook’s or any digital currency, but I suspect that the main reason for Libra’s failure is the protection of vested interests.
• The banking system as it exists to today is not fit for purpose.
• Despite massive consumer digitisation, it is still slow, overly bureaucratic, expensive and cumbersome to send money through the global banking system.
• Transactions which should already be frictionless and instantaneous are often taxed by multiple handlers and take days to complete.
• This is an industry that is more ripe for disruption than any other and yet all attempts to force it to modernise have failed.
• Facebook’s Libra project is the latest attempt to fail and while there are certainly issues that need to be addressed, I think that this one had real potential to offer consumers a decent digital currency (see here)
• The original list that signed up was impressive, particularly as Mastercard, Stripe, Visa, eBay and PayPal would have been instrumental in driving the adoption of the digital currency by consumers.
• Given the right protections for consumers, I think that Libra could have been extremely successful but clearly, the banks and payment companies saw this as an existential threat to the gravy train.
• This, I suspect, was the main reason why there was so much horror and dismay from politicians and regulators when Libra launched in June.
• Following what must have been serious heat from banks and politicians, all of the really key players have pulled their backing from Libra, leaving it floundering.
• Facebook is putting a brave face on it with David Marcus urging caution when predicting the fate of Libra, but it is clear to me that its fate is sealed.
• This is because there is no way that Facebook will be able to do this on its own.
• Facebook’s reputation with regulators has been dreadful ever since the Cambridge Analytica incident meaning that no one really thinks that users should hand over their banking activities to Facebook.
• Tencent and Alibaba have managed to do it in China but as always, the situation there is very different.
• Credit card penetration was not that high meaning that there were only untraceable cash-based transactions to disrupt.
• Hence from a regulatory perspective, both AliPay and WeChat Pay were a big improvement and hence had the tacit approval of the Chinese Government.
• In developed markets, card payment and banking penetration is high meaning that a very low-cost monetary transfer system from a company where almost everyone is already a user would be a financial catastrophe for a large segment of the economy.
• The problem as I see it is that politicians do not want a large segment of the economy put out of work and the sector itself will always fight to preserve its gravy train for as long as it can.
• The Chinese example shows that if there was a will among the powers that be to make a digital currency work in developed markets, it could be done without any real difficulty.
• Hence, Libra looks set to enter the well-populated graveyard of those that have attempted to disrupt the banking industry and failed.
• For as long as the banking industry fails to improve its service and cost to consumers, there will be no shortage of attempts to disrupt it.
• The best thing banking can do is either make the existing service so good that there is little incentive to create an alternative or create the alternative itself.
• I have little hope for either and while the industry remains protected, very little is likely to change.