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Exus Blog Article

Facebook and Libra: How social media companies are getting into banking, and what banks can do about it

6 minute read


Yes, it’s actually happening. Facebook is throwing its sizeable 2.4 billion user-a-month hat into the cryptocurrency ring. 

The news was once little more than a rumor, lent weight by Mark Zuckerberg’s meeting with Bank of England governor Mark Carney back in April. However, it’s now been confirmed by the Financial Times that Facebook has hired former Standard Chartered lobbyist Ed Bowles to help prepare the runway for the launch of its global cryptocurrency.

Of course, Facebook’s Messenger app already allows for native peer-to-peer payment, but it’s restricted to existing currencies and accounts linked to traditional debit cards. This new direction, however, would see them stepping directly into a bolder frontier - the world of the blockchain-based digital coin.

Zuckerberg’s latest pet project seeks to allow users to make payments across the entire Facebook ecosystem (which includes Instagram and WhatsApp) as well as the internet at large. The company is also talking to US regulators regarding its financial ambitions, which is particularly notable. Regulators have every right to be concerned given the privacy scandals Facebook has faced in recent years.

Regulations or no regulations, however, it seems that a Facebook bank is very much a reality. But why are the social media monolith and so many of its competitors and tech firm rivals so interested in the banking sector? What are their plans? And how should retail banks be reacting and (perhaps) resisting?

The (social) network effect

Facebook is far from the only online player with ambitious plans for the banking sector, with messaging apps Signal and Telegram planning their own digital cash systems. Asian competitors are investing heavily in the sector too, though there are heavier regulations for companies to contend with in the area. 

Indeed, China’s mega player Alibaba has yet to jump full force on the bitcoin bandwagon as China has banned the use of cryptocurrency in the country.  Though ‘Alipay’ founder Jack Ma still believes in the prospects of blockchain technology for cloud storage and the logistics of the corporation.

As with all things tech-focused in the modern world, all eyes are obviously cast towards Apple. The recently announced Apple Card could earn the company $1 billion dollars in revenue within a few years of its launch, according to analysts, with partner Goldman Sachs handling the vast majority of the risk and its actual operation. Arriving in the US this summer, the card offers a variety of benefits, including competitive interest rates, a lack of fees, and same-day usage after acceptance. This will make the card an extremely attractive proposition for iPhone users. 

It should also be noted, however, that rival bank Citigroup pulled out of advanced negotiations with Apple on the project before Goldman Sachs stepped in, fearing it might lose money on the partnership. So, whilst Goldman Sachs and Apple have every reason to be optimistic about this new venture, they should tread carefully. 

There has also been a lot of talk around Amazon, with a survey by Cornerstone Advisors finding that 30% of consumers would open a hypothetical fee-based bundle account with Amazon – one that included services like cell phone damage protection, ID theft protection, and roadside assistance. 

These are services also offered by many banks as ‘premium’ services. The difference here, however, is that Amazon could potentially lump this account in with their Amazon Prime service and offer a level of convenience and extra service that most banks could only dream of.

Google, meanwhile, is not looking to get into the banking game per se. Instead, the tech giant appears to be interested in partnering with banks such as KBC Bank Ireland. The two companies recently teamed up to demonstrate a new Google app that allows users to open a current account in under five minutes using a selfie for identification. Google already has one foot in the sector, of course, with their Google Wallet and Android Pay platforms, but is seemingly content with using existing currency and working with banks, not against them. For now.

In all, it’s safe to say that all of these initial forays will lead to more investment from these companies in the future. 

Why are they getting into banking?

Facebook (and every other social media platform, for that matter) is an entity that lives or dies by one thing - data. They want to know more about us than they do already and use that information to make themselves even more powerful. With a planned “pivot to privacy” on the agenda, which will allow users to communicate over encrypted channels, Facebook is about to lose a lot of valuable data. So the move into the banking sector is appropriately timed. 

Banks have no shortage of data on their customers. From major life events (buying a house or saving up for retirement) to more trivial matters such as how much they spend on their weekly ‘big shop’, customers are in the habit of furnishing their banks with invaluable information. All that juicy data would certainly make up for the data that Facebook could be about to lose as its users start demanding more privacy.

Facebook could also make an absolute killing in developing markets, where many people still don’t bank. In fact, some 1.7 billion adults worldwide still don’t have access to a bank account – prime targets for ‘Facebank’. Indeed, Facebook has already helped boost the e-commerce market in countries like Thailand, where sales via Facebook Marketplace account for more than 50% of all e-commerce, with an average of around 30% in Southeast Asia generally.

Expand its reach beyond P2P online payments to commerce, and Facebook could claim part of the fees that now go to card issuers. They could also potentially charge more for ads, as buying the products being promoted would be faster, easier, and potentially safer using this new currency. 

Anyone using this hypothetical ‘Facecoin’ would surely be deluded to think that Facebook won’t be making a careful note of every transaction. It’s hard to say whether this will make a difference to uptake, however, in the wake of the Cambridge Analytica scandal, as many as 40% of US users took a break from the app and 44% of younger users deleted the app entirely. So it’s certainly not immune to bad press. That being said though, there is no end to the number of things people will be willing to give up in the name of convenience. 

“Convenience,” is really the word that sums it all up. It’s the same reason why people continue to buy their wares exclusively from Amazon, whilst decrying its status as a tax-dodging corporate monster - it’s easy. From a customer perspective, why would you bother ducking into multiple banking apps when you can manage everything (including your finances) in one app?

Still, there will always be a place for banks as long as they are willing to do what it takes to avoid displacement. Even with the big tech companies throwing their ‘new money’ weight around the locker room, there are those that will be resisting the urge to jump on the social media banking bandwagon.

What can banks do?

It’s a little ironic that Facebook and Google are trying to become more like banks, because, by and large, banks are also slowly becoming a little more like Facebook and Google. Lloyds Bank in the UK is intending to move 500,000 Intelligent Finance division customer accounts from its legacy IT platform onto fintech company Thought Machine’s cloud-based platform. Said platform, known as Vault, is also being eyed up by digital-only bank Atom. Thought Machine is actually led by former Google tech lead Paul Taylor and is primed to create the closest thing to ‘Google Bank’ possible without the big G themselves getting directly involved.

Still, even with banks becoming more like Google, they still lack the digital infrastructure and acumen of the biggest boys on the field and CEOs are starting to panic as a result. So what tools can they use to keep them at bay? The most convincing argument that both traditional and new-school digital banks have on their side is this - if we can’t trust Facebook and Google with our data, why should we trust them with our money? 

There’s a real opportunity here for banks to take inspiration from what these companies have achieved from a customer experience perspective and apply that to their own tech, whilst offering something those companies never could in such a ‘woke’ society - trust. Privacy issues have followed these companies around for years, only gaining steam with each new scandal. 

Banks, however, are still widely trusted, with a poll of 47,000 consumers in 28 countries recently finding that 59% of customers would be willing to share more information with their banks and 53% would be fine with their bank using location information to offer personalized local offers. Can you imagine people being as open and as happy with Facebook or Google doing likewise? There’s no telling what these companies can and will do with our financial data and that alone might be enough to put off many potential users, regardless of how much convenience they’re missing out on.

The face of the future

It’s no small wonder that the social media giants and tech moguls are interested in the financial sector. It is, after all, one of the oldest and most lucrative industries of them all. To remain relevant, banks really need to lean on the failings and learn from the successes of the potential tech usurpers and make sure that transparency and security are front and centre when it comes to both functionality and promotion. 

So the final message here? Retail banks need to be like them, but not too much like them. They also need to keep an eye on the smaller, digital-focused challenger banks waiting in the wings, as they are better equipped to copy their digital cousins than their more established incumbents. 

However, as long as the focus remains on the customer first and functionality remains at least on par with what the ‘Facebanks’ of this world have to offer, then the traditional banks should be able to weather this digital storm quite comfortably. They might even be able to thrive in it.

Written by: Chris Maranis

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