On May 2, 2019, the Wall Street Journal published an article entitled “Facebook Building Cryptocurrency-Based Payments System; Social-media giant is recruiting financial firms, merchants to help launch payments platform.” For those of you who don’t have a subscription to the Wall Street Journal, the main points are these:
- Facebook wants to create a private cryptocurrency backed by cash (also known as a “stablecoin,” because it is not subject to the volatile supply-and-demand swings of open cryptocurrencies) “that its users could send to each other and use to make purchases both on Facebook and across the Internet.”
- Facebook is seeking $1 billion in investment dollars from an array of “financial institutions” to back the cryptocurrency, although only networks and processors are mentioned – First Data, Visa and Mastercard.
- Facebook is talking to e-commerce companies and “apps” (sic) about accepting the cryptocurrency, and about investing in the initiative (it is unclear whether the investment would be in the cryptocurrency itself, or some other aspect of the platform).
- Facebook is exploring a “buy button” that could be embedded into e-commerce sites, like PayPal, Apple Pay, Visa Checkout, Masterpass, Amazon Pay, etc.
- “The pitch to merchants is a break on fees…Facebook envisions eliminating swipe and other card processing fees that merchants pay on transactions…”(emphasis mine)
There are several things in this article that don’t make any sense to me. Let’s go through them one by one:
- Why would Visa and Mastercard invest in a cryptocurrency that is explicitly designed to eliminate their business model? Note that Facebook Coin (to coin a term) does not just avoid interchange but “other” card processing fees. That means the Visa and Mastercard switch fees may be out, as well as the acquirer fees. How does First Data feel about that?
- Why is a cryptocurrency needed, anyway? If Facebook actually has a load of cash on hand to back the coin, why not just act as a clearinghouse, and use the ACH to settle? Cryptocurrency only makes sense for cross-border applications, where there are no cheap settlement channels, and maybe this is part of the plan, but the article doesn’t say that.
- An earlier Bloomberg article revealed a Facebook plan focused on cross-border payments using its WhatsApp messaging service, with a similar $1 billion price tag, so maybe this is just an evolution of the same plan (https://www.bloomberg.com/news/articles/2018-12-21/facebook-is-said-to-develop-stablecoin-for-whatsapp-transfers). However, this just brings us back to the obvious alternative noted above of acting as a clearinghouse. That means integrating with domestic payment networks, but that would not be more difficult than integrating with domestic cryptocurrency exchanges.
- Is Facebook talking to regulators? I assume so, although the article pays no attention to this issue whatsoever. If Facebook were using existing payment networks, they would be covered under the regulations pertaining to those schemes; by striking out on their own, they introduce uncertainty and risk for no good reason.
- News flash: cryptocurrency is not free. Most exchanges now charge a 1% fee, and there can be minimum withdrawal amounts. This requires merchants to have a completely separate process for accepting cryptocurrency payments, since it is not integrated with their bank or acquiring processor. When you look at what these merchants are paying for bank cards, the savings are significant, but not necessarily enough to switch.
- How does Facebook make money? Unless they are doing this to build the platform, there has got to be a transaction fee in there somewhere, which will increase the cost to merchants even more. Shifting fees from networks to Facebook may be good for Facebook, but merchants may not see much of a difference. If they stay within the Facebook ecosystem, they may see major savings, but how do they use the Facebook coin? Buying ads will account for a small fraction of the total, unless they are doing it wrong (advertising costs should never be anything more than a fraction of sales).
- Why would consumers use this over a bank transfer or prepaid account? Yes, some are unbanked, especially outside the developed world, but then they probably use mobile payment services or prepaid cards. Anyway, there has to be some way of buying Facebook coin in the first place so why not just use the established methods?
- Are consumers really going to trust Facebook with their financial data? There was an outcry when it was discovered that Facebook was negotiating with JPMorgan Chase to report transaction data through Facebook Messenger (https://www.paymentsjournal.com/facebook-inc-wants-your-financial-data/). Not the contents of the transactions, just the amount and merchant. Facebook Coin would give Facebook detailed information, not just about your interests, but about your willingness to spend money on them. Plus, you not only have to trust Facebook with the data, you also have to trust them not to lose it; Facebook’s recent track record is not at all encouraging (https://www.forbes.com/sites/thomasbrewster/2018/09/29/how-facebook-was-hacked-and-why-its-a-disaster-for-internet-security/#4bab179a2033). It all sounds crazy, given the scrutiny the company is currently under, with at least one presidential candidate pushing to break up the company (https://www.cnn.com/2019/03/12/politics/elizabeth-warren-facebook-ads-break-up/index.html).
In short, there’s not enough here to fairly evaluate the offering, but what there is raises more questions than it answers. I would not bet on this seeing the light of day. Maybe there will be a face-saving Facebook Coin of some sort, but it will probably end up being a digital currency or loyalty point scheme without the baggage of a cryptocurrency. It’s just not necessary to do what Facebook wants.
Overview by Aaron McPherson, VP of Research Operations at Mercator Advisory Group