On the first page of its introduction to its new crypto-currency (of sorts), Facebook extols its product as a tool to empower the unbanked.
Facebook gives an accurate description of the problem, but it jumps the shark when it claims that that Libra be a difference-maker.
According to Facebook’s white paper:
“All over the world, people with less money pay more for financial services. Hard-earned income is eroded by fees, from remittances and wire costs to overdraft and ATM charges. Payday loans can charge annualized interest rates of 400 percent or more, and finance charges can be as high as $30 to borrow $100. 4 When people are asked why they remain on the fringe of the existing financial system, those who remain “unbanked” point to not having sufficient funds, high and unpredictable fees, banks being too far away, and lacking the necessary documentation.”
Facebook has it right about the cost of remittances and the interest on same payday loans. Remittance pricing is usually opaque and expensive. It’s a classic example of a market where consumers have little ability to compare pricing without expending a lot of time and effort. If you go to a Western Union, for example, you’ll see prices that pivot depending on the source of funding (cash, debit, credit, bank EFT), the destination country, and the means of collection on the receiving end. Costs from the United States might range from a few dollars to more than ten. Prices likely trend higher in other parts of the world.
Four hundred percent is a happy medium for a payday loan. Online payday lenders usually charge higher rates. Storefront payday lenders in Texas, Utah, Idaho, or Nevada can have rates north of 600 percent.
However, does that mean that Libra can be the change agent that migrates people to the formal banking system?
The answer is decidedly a “maybe.” I say maybe because prospects for empowerment in foreign countries are realistic, whereas it is a stretch to imagine that anything close to crypto could be the answer in the United States.
The problem in the US begins with the essential funding process for an account. To load funds electronically, a resident of the United States needs to have a bank account. Deposits to a Facebook wallet must run through one of the automated clearing house solutions, otherwise known as an “ACH.” You cannot authorize an ACH outside of a bank account. Theoretically, a person could transfer funds from a non-bank wallet such as Venmo or Cash App, but the same problem applies here. Moving money out requires the use of ACH.
You might say, “well, a person could load cash onto a prepaid debit card or a PayPal account,” and that would be true. However, those systems are existing solutions – meaning that Libra has done nothing to expand the set of workarounds.
Let’s reconsider the realities of how solutions for migrating the unbanked into the payments system occur today, and let’s remember that many of the unbanked believe they cannot qualify for an account. We have to change the perceptions among the unbanked. We have to convey the notion that they will be approved, even if they have been turned down in the past. According to the FDIC, many doubt that they’ll derive utility from an account, most often because they don’t have the key input. That’s right – many people don’t have enough money.
I see this in play in Durham through recent conversations with a local free health care clinic. This clinic serves people who cannot afford “Obamacare” and who will not qualify for Medicaid or Medicare. They are indeed the “least of these.” (Matthew 25:31-46) We have met with staff from the CFO down to the client-facing caseworkers. The CFO has been positive, if only because he sees how more clients with bank accounts would reduce friction for their collections department. Their caseworkers say, without qualification, that their clients do not have any money. The few with the kind of disability that generates a benefit payment face a systematic hurdle. If they left enough money in an account, their benefits could be suspended.
The Bank On project offers a range of overdraft-free accounts, but marketing the opportunity requires the cooperation of local on-the-ground organizations. Although Bank On is nationwide, it is not scalable. Moreover, you’ll find that banks vary significantly in their commitment. In some instances, it can be challenging to find the Bank On-approved “safe account” on their website. Without an enthusiastic effort by a bank’s marketing department, results suffer. Bank On deserves credit, nonetheless, as they have introduced many people to accounts. The question remains – to what cost per account?
WiseWage has taken a different approach. Just as is the case with Bank On, WiseWage starts with a selection of overdraft-free accounts. Even better, its accounts do not have fees. Safe Accounts at Bank On usually have a monthly maintenance cost of four or five dollars. Unlike Bank On, WiseWage does not have as many local partners. It’s mostly a digital platform. To paraphrase the famous jingle for a light beer, WiseWage is more opportunity for scale, but less touch.
Attaining trust is not easy. Most non-profits who serve clients tend to fill niches with known solutions. It’s less often the case that a social worker becomes an agent for innovation. I say this from my experience. Yes, there are cases of groups that want to try new ideas. I recently met a group from Chicago that has committed itself to find new ways to use emerging technology to expand how it helps its clients. That’s good – we need more groups to adopt their attitude. Still, for now, most non-profits identify with a specific fix. Their social workers solve for one thing. Unless their core mission is to help the unbanked, they are likely entirely blind to the problem. I commend Bank On for finding a way to penetrate their defenses.
The marketing of Libra has its hurdles. Facebook Libra starts with the benefit of unparalleled scaling opportunities, but with sizable work to do in terms of building trust. The fact that a small group of organizations will govern Libra differentiates it from the traditional crypto governance model of decentralization.
My key point is that trust matters. Bank On has tapped into organizations that have already established a trusted relationship with many of the unbanked. Facebook does not.
Thus, I see three likely true outcomes:
Libra expands access to electronic payments in underdeveloped economies.
Libra makes little impact on the number of unbanked households inside the United States
Libra struggles to build trust.