Facebook's Libra could serve the underserved

Facebook's Libra could serve the underserved
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Facebook, which already covers about a third of the world’s population with its 2.38 billion users, now wants to offer payment capabilities globally to those who don’t have bank accounts or access to other financial services with the new Libra coin virtual currency.

While social media and financial transactions may seem like an odd mix, especially given privacy issues and data breaches at Facebook and elsewhere, the combination of brand recognition and convenience will likely go a long way to winning over global customers. And when it comes to markets and technology these days, convenience always wins.

While Facebook is clearly a driving force behind Libra, its direct involvement is through its Calibra subsidiary that will produce a digital wallet for using Libra. With Calibra as a distinct entity, Facebook has pledged to keep a “wall” between social data and financial data.

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The Libra coin is not a traditional cryptocurrency like Bitcoin. Rather, it is a utility token (much like JPMorgan’s JPM Coin) run by permissioned partners. While Libra is pseudonymous like many cryptocurrencies, it is not decentralized and does not offer the same immutability that typical cryptocurrencies offer.

The world does not need another cryptocurrency. Rather, as a digital or virtual currency, Libra is similar to China’s WeChat Pay and Alipay. But Facebook’s global reach means Libra has the potential to become a global ecosystem for underserved consumers.

Initially, the Libra coin won’t be an attractive alternative for everyone, especially those consumers in the United States who have many options for making payments, such as debit cards linked to bank accounts, credit cards and a variety of online bill-paying and purchasing apps.

But this is not the audience Facebook is targeting. In its announcement, the company cited statistics that nearly half of the adults worldwide do not have an active bank account. Nearly 1 billion women are unable to participate in the financial system, and the gender gap for women accessing financial institutions runs about 9 percent in developing countries.

At the launch, Libra coins can be sent to almost anyone with a smartphone, which will be a big convenience factor for people sending money to family members and others in developing countries. Later, services such as bill paying, making purchases or paying fares for public transportation are expected to be added.

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When seen through this lens, Facebook and its Libra partners could make a big impact in providing for financial services where they’re needed most, outside of any central bank authority.

A white paper from the members of the Libra Association, based in Geneva, Switzerland, puts forth the aspiration of technology companies and financial institutions working together “to help increase economic empowerment around the world.” As “the internet of money,” Libra can help facilitate “global, open, instant, and low-cost movement of money.”

Libra is being organized as an independent, not-for-profit that will involve multiple partners (28 currently), including financial institutions, such as Mastercard and Visa, which are already regulated.

This eliminates a potential headache for Facebook and also could open the door in the future for more financial services via Libra, such as microfinance and loans.

Other founding members of Libra include eBay, PayPal, Vodafone and Spotify, for whom participation in Libra could lead to greater customer loyalty among those who don’t have credit cards but can use Libra for payment.

Libra will be backed by a basket of international currencies and other assets, which should lend to its stability —unlike Bitcoin, which has seen sharp price swings, and frankly with more stability than the currencies of some developing countries. Venezuela, for example, has seen extreme currency devaluation.

Further enhancing this digital currency is the fact that the software used to implement the Libra Blockchain is open source, allowing developers to build on it. As the white paper states, this would enable an “open, interoperable ecosystem of financial services that developers and organizations will build to help people and businesses hold and transfer Libra for everyday use.”

As a vision, it’s compelling, but ultimately needs to be proven. Given the global reach of Facebook and the capabilities of other partners in the Libra Association, convenience and brand recognition may make this digital currency a solution for underserved consumers around the world.

Sarit Markovich is a clinical associate professor of strategy at Kellogg School of Management at Northwestern University.