Facebook is joining Apple and Google in coming after Citibank and Chase

The tech giants are coming for the banks. If there’s one message to be taken out of Facebook’s aggressive push into blockchain-based payments via its new cryptocurrency, libra, it’s that Facebook is now also a FinTech company.

It’s not alone. Apple and Google have both moved aggressively—but with mixed success—into the payments market with their mobile wallets. And in March, Apple joined forces with Mastercard and Goldman Sachs to launch the Apple Card, a digital payments credit card designed to work primarily through Apple Pay.

Unlike the many startup FinTechs using blockchain to try to disrupt the banking industry, companies like Facebook, Apple, and Google have the size, the scale, the money, and the experience being disruptors to take on the banks directly.

“The critical question that decides whether Libra will be a significant challenger is the initial adoption,” said Igor Pejic, BNP Paribas Personal Banking’s head of marketing and author of “Blockchain Babel” a Financial Times book-of-the-month released in April. “It is no wonder Libra is focusing on the 1.7 billion unbanked individuals in the world; most of them are living in areas with no available, or highly expensive, money-transfer infrastructure.”

In developed countries, the libra coin will be a harder sell, Pejic added. “The existing infrastructure of credit cards, bank transfers, and online payment providers works well and there is no incentive for the customer to switch.”

And indeed, while mobile wallets like Apple Pay and Google Pay are used by about a quarter of Americans, according to a report released on June 5 by the Electronic Transactions Association, they have not taken off as quickly as predicted except in Asia. China’s WeChat and AliPay, on the other hand, have been enormously successful, with $9 trillion spent on mobile transactions in 2016, as opposed to $112 billion in the U.S.

Still, it’s a business strategy with promise. In 2017, McKinsey & Co. reported that “73% of U.S. millennials say they would be more excited about a new offering in financial services from Google, Amazon, PayPal, or Square than from their bank—and one in three believe they will not need a bank at all.”

PayPal is on board with Facebook’s Libra experiment, but Amazon is not interested in creating a cryptocurrency, Patrick Gaulthier, vice president of Amazon Pay, said earlier this month. Which is a good thing for banks, as Amazon would likely be a bigger threat than Facebook. A 2018 Georgetown University poll found that Amazon is substantially more trusted than banks, placing second after the U.S. military in a survey of the most trusted institutions in the U.S. Banks came in at No. 11. (Google was No. 3.)

Nor is Libra the only way Silicon Valley is taking on large financial institutions. Slack just followed Spotify in going public without an IPO, altogether bypassing the investment banking community which sells IPO stocks before going public.

Stealing the consumer

The banking giants are all focused on and experimenting with blockchain—JPMorgan even launched its own cryptocurrency, the JPM Coin—but they are generally focusing on back-end functions like completing cross-border money transfers or settling stock and bond transactions automatically using smart contracts.

There’s a reason for this. There is a staggering amount of money to be saved by using blockchain to cut out middlemen like financial messaging service SWIFT—used in every interbank transaction—while speeding those transactions from days to seconds.

But the big profit in banking is not from moving the money, said Pejic. It is from holding the money.

That’s why the real threat blockchain poses to banks’ business model is on the front end, where the company meets the customer. And it’s exactly what Facebook is targeting with its Libra coin project: customer payments.

Once the tech giants get their foot in the finance door with payments, they become a serious threat to banks, Pejic said. That’s because payments are how consumers interact with their banks. They use credit or debit cards, “every day, maybe multiple times … whether it’s to fix [a] car or for a bank transfer.”

And once the customer starts using digital payment tools like Facebook’s Calibra, Apple Pay, or Google Pay, and starts thinking of them of them as the company fulfilling their payments, “then why not think of them as a whole finance provider,” asked Pejic. “If [banks] let the data giants get a foot in the door by using payments … it’s not long until they have very powerful competitors.”

In creating Libra, Facebook is trying to do to banks what Apple did to Nokia with the iPhone. “I think the same thing could happen here now with blockchain,” said Pejic. “They all have huge data centers, they have a big global brand, and they’re quite frankly pushing into payment Internet financial services.”

Facebook has been pretty up front about that, and it’s one good reason that the initial 28 members of the Libra Association included payment processors—who have to fight now—but not banks.

For one thing, the Libra Association White Paper refers to its mission as creating “global currency and financial infrastructure,” not just a payment processing method.

For another, in an interview with CNBC on June 18 David Marcus, the head of Facebook’s Calibra division, said the company will eventually offer other financial services consumers generally get now from banks, like loans. “If the network is successful, it will be a big opportunity for us to provide lending to all these consumers,” Marcus said.

But Libra loans aren’t something for the future. One of the 28 founding Libra Association members, the non-profit Kiva, is microloan company that has crowdfunded $1.31 billion in loans to 3.3 million people in 78 developing countries.

“Kiva is focused on addressing the systemic barriers impeding access to financial services for 1.7 billion unbanked individuals around the world,” said Neville Crawley, its CEO, in a press release. “We’re … excited by the potential for new technologies to create a more inclusive financial system.”

If the world economy continues to strengthen, a fair number of those people will be moving out of poverty in emerging markets. And if they started banking with Facebook, why would they move over to, say, Chase, particularly if Facebook’s Calibra subsidiary has started offering the same financial services, like interest-bearing savings accounts and consumer and business loans.

That said, it’s worth noting that India’s Economic Times cast doubt on Libra’s ability to launch in the country, citing a legal push to ban cryptocurrencies. And Facebook is not even in China.

Facebook’s trust problem

When it comes to privacy Facebook’s three magic words are “without customer consent.”

As in, Calibra’s Customer Commitment on consumer data privacy: “Aside from limited cases, Calibra will not share account information or financial data with Facebook or any third party without customer consent.”

That’s the key phrase in Facebook, Calibra, and the Libra Association swearing up and down they will respect and proactively protect libra users’ account information and financial data, not using it for ad targeting.

Facebook has been particularly aggressive in selling this promise, and with good reason. Its history of protecting users’ personal data is atrocious, racking up huge fines. On April 24, Facebook said it expects a $3 to $5 billion fine from the U.S. Federal Trade Commission for privacy violations, and the E.U. could fine it as much as $1.63 billion for General Data Protection Rules (GDPR) violations, CNBC reported in October.

Beyond that, 60 percent of Americans said they don’t trust the company with their personal data, according to an April 2019 NBC News/Wall Street Journal poll.

But Libra is not about selling ads. It’s Facebook playing the long game to break into the financial services market. The reality is, anyone applying for a loan knows they have to consent to whatever the lender deems necessary.

Connecting social media and spending

Libra is where data privacy and banking meet.

“Facebook is entering the finance sector via payments, and more particularly via cross-border payments,” Pejic said. “Facebook is positioning itself as a financial company, and more importantly, it is collecting financial history data that, for example, can later be used to assess creditworthiness and to hand out loans without heavy vetting processes.”

Facebook may only have one vote in Libra, but Libra is more than just a platform for providing banking services—it will also have information, such as transaction data, that gives a picture of the customer, he added.

That means Libra will know “the frequency and volume of person’s transactions,” said Pejic. “[It] can analyze to whom money is sent and from whom it is received…the trends of [a person’s] spending behavior. If, for example, a person is increasingly spending money in casinos, you can anticipate that he or she will have problems with paying back loans. These are just some examples of indicators that can be used in a risk analysis.”

There is already precedent for using non-traditional data, including social media data, in determining creditworthiness. The non-blockchain FinTech Lenddo works with financial institutions so “customers can use their social networks and other data such as Facebook, Linkedin, Google, Yahoo, and Twitter to prove their identity and creditworthiness,” according to the company’s website. “Lenddo now offers a simple and secure way to prove identity and establish your character online to unlock loans, online shopping, and improve chances of employment.”

And Facebook has already made overtures to major banks, looking to get data about where credit card customers shop, the Wall Street Journal reported in August 2018.

While connecting spending data with social media habits would be very useful working with unbanked people who haven’t had a credit card to pay off on time, the potential benefits to a lender would be just as big in developed economies.

“The merging of Facebook’s data pools with [Libra’s] transaction data could become a very powerful tool to forecast future behavior,” Pejic said. “You might not need the last six income statements.”