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Is this Facebook’s ‘M-Pesa’ moment?

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In every talk I have given to banking groups in recent years, I have warned them that future competition will be nothing like what they have been used to. The biggest threats to their future will not come from other bankers, because those guys are just as confused and hesitant and invested in the past; it will not even come from FinTechs, because those guys can be co-opted to become the allies of incumbent banks – for those with the vision to partner up.

No, the greater threat will come from something that’s right under bankers’ noses: Big Tech. The giant companies that power everything that’s happening right now on the smartphones of bankers are the ones who will pose the existential danger. Why? Because they hold so many of the crucial cards. They have global brand acceptance. They have the cuffs on billions, not millions, of people. They have the best brains working for them. They have made the greatest investments in the new technologies that will change the game. All it will take is for them to make their first foray into payments and money transfers, and the Trojan horse will be in motion…

Well, that first foray just happened. Facebook announced its new digital currency, Libra.

On the face of it, this is nothing. It’s just an in-house payments system. You know when you visit a theme park or casino, you usually have to change your dollars and shillings into tokens, use those to pay for stuff, then change what’s left over back into real money as you leave? Isn’t this just that?

Ahem. True, Facebook would want you to buy Libra coins using your dollars, use those coins to send money to any other Facebook user in the world, and turn your Libra hoard back into dollars any time you like. This is not a cryptocurrency; it’s tightly controlled and designed to be stable against major currencies, and it’s meant to be bought for convenience, not speculation. Pretty harmless, huh?

Think again. Here’s what else Libra might be doing. It might become a no-fee way to send money across borders. It could become a major payments platform for e-commerce, sidestepping credit-card and bank fees. And since Facebook controls not just its own dominant social network, but also Instagram and WhatsApp, that could give it billions of possible daily money movements in a stroke. The launch goal is to handle 1,000 transactions per second. Also, the blockchain platform underlying Libra could allow smart-contract settlements, loans, insurance…

I trust every banker in the world is now sitting up straight.

Oh wait, you say. Regulators will never permit this. They’ve already expressed concerns. And this is Facebook, of Cambridge Analytica notoriety, reeling from a record $5b fine for failing to protect user data. It won’t be allowed.

I would just remind you that that is exactly what you said about M-Pesa ten years ago, bankers…

Facebook has actually been quite clever about this. The Libra blockchain is controlled by 100 members of a separate, neutral foundation. Facebook is keen to assure everyone that the treasure-trove of financial data that Libra will throw up will not be accessible to it (unless perhaps you give it permission…ahem again).

Libra may never get off the ground, regardless. Central bankers will have deep jitters about a borderless currency on this scale. We will find out in the coming months.

But whether Libra flies or not is emphatically not the point. If you’re a banker, don’t hang your future on this thing getting blocked; understand what’s really going on. Traditional banking and payments are broken. They are too cumbersome, too expensive, too old-world for customers in a click-click-done world. Libra is just one way forward. Many others will pop up. Some of them will fly. Some of them may kill you.

What any bank should be doing right now is sitting down to work out what the hell to do to compete in a world where secure financial transactions will be completed in seconds, not weeks. Top teams should be preoccupied with how to remove frictions, improve speeds, design smart interfaces, reduce fees. That will involve fresh thinking, new talent and many collaborations. And if you haven’t been doing that with any seriousness, tomorrow morning is already too late.

Otherwise, prepare to be ‘M-Pesa-ed’ all over again, bankers. It will hurt.

(Sunday Nation, 28 July 2019)

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