Facebook thinks it can displace banks. Good luck with that.
Facebook’s reveal of its Libra cryptocurrency and its intentions to reach millions of unbanked customers makes it the latest company to add the promise of usurping the role of banks into its business model at a time when public scrutiny is high.
It’s a strange time for Facebook to make a play in financial services. Consumer faith in the social media company is arguably at a nadir, governmental antitrust inquiries are gaining momentum and CEO Mark Zuckerberg is a frequent target of both sides of the political spectrum.
While it’s true that many people still distrust traditional financial institutions following the financial crisis, faith in Facebook is equally challenged, making it an unlikely savior of the unbanked.
Facebook is not alone in trying this tack. Uber, which is among the Big Tech companies backing Facebook’s crypto plans, is reportedly working on its own fintech push that may eventually include banking. But just like Facebook, Uber’s brand is under fire. It lost $1 billion in the first quarter, had a lackluster IPO and is being probed by regulators for its business practices.
To be sure, banks face a real threat of displacement. Many bankers privately acknowledge that the mobile banking experience — and digital banking in general — still needs improvement. Customers don’t understand how they can order something instantly online, but still have to wait potentially days to find out if they qualify for a loan. Fintechs have been making substantial inroads in improving the customer experience, gaining momentum along the way.
Bankers also rightly fear that behemoths like Google or Amazon, with their vast access to customer data and spending habits, could instantly become a big player in financial services if they were to launch a banking product.
Yet it’s fair to say that while Facebook too has access to reams of customer information, it’s not exactly in Google or Amazon’s league — at least when it comes to customer trust. As recently as 2017, Facebook polled similarly with the other two tech giants, but the Cambridge Analytica scandal and revelations that Russia used Facebook to attempt to influence the 2016 presidential election have changed that dramatically.
In a survey by Georgetown University of 5,400 Americans last year, respondents were asked to rate their faith in 20 various firms and institutions. Amazon and Google ranked No. 2 and No. 3, respectively. Facebook was third from the bottom, barely above political parties and Congress. Banks, by comparison, were roughly in the middle.
Still, it’s easy to see why Facebook is launching this effort. It’s the promise of scale. Given their vast reach, Facebook can reach 190 million consumers in the U.S. and potentially billions of customers worldwide instantly. Those figures would be the envy of any bank.
But convincing customers to jump ship on their current financial institution may be a tougher sell than Facebook estimates. As much as banking customers like to complain about lousy service on Twitter, uprooting their financial life isn’t a priority for most. Even the unbanked may be wary of Facebook, given data privacy fears and reputational concerns.
And as Google and Amazon have already discovered, banking is a very different kind of business from most others. For one, the regulatory burdens placed on traditional financial institutions are severe. Any move Facebook makes will be heavily scrutinized.
At the moment, Facebook isn’t aiming that high, however. It’s jumping into cryptocurrency because it’s one of the few areas where regulators are relatively scarce. But that may not be the case for long. The Securities and Exchange Commission is still figuring out how it will treat crypto sales, either as a security or utility. The Consumer Financial Protection Bureau is also eyeing the space.
Indeed, Facebook diving in may accelerate action by regulators. Facebook’s announcement on Tuesday has already furthered calls for official inquiries into crypto and heightened debate about how to prevent Big Tech from disrupting the roles of central banks in digital currencies. It’s also again raised the specter of data privacy, even though Facebook insists its crypto endeavor will not have access to Facebook’s customer data.
The leaders of both the GOP and Democratic wings of the House Financial Services Committee called Tuesday for Facebook to testify on its crypto plans.
"With the announcement that it plans to create a cryptocurrency, Facebook is continuing its unchecked expansion and extending its reach into the lives of its users," said Chairwoman Maxine Waters, D-Calif. "The cryptocurrency market currently lacks a clear regulatory framework to provide strong protections for investors, consumers, and the economy. Regulators should see this as a wake-up call. ... Given the company’s troubled past, I am requesting that Facebook agree to a moratorium on any movement forward on developing a cryptocurrency until Congress and regulators have the opportunity to examine these issues and take action."
It’s clear Facebook is positing Libra as a claim to the future. But it may not find much success with it until it can shake off its past.
Bankshot is American Banker's column for real-time analysis.