Libra, the new Facebook currency, could do away with pricey credit card transaction fees for retailers if Facebook's 2.4bn users worldwide support its push into payments
Libra is the new cryptocurrency that Facebook plans to launch worldwide in 2020 that will enable its 2.4bn users worldwide to pay for goods and services or send money worldwide with no transaction fees.
Why is Libra significant?
Libra will give Facebook the full picture of its users. The world’s biggest ad platform already know almost everything about you – who you are friendly with, where you go, what you like and what you think (at least publicly). However, although it knows which products get your attention so small businesses can sell to you, what you actually buy has been unknowable. Until now.
How does Libra work?
In truth, Libra is not really an unregulated cryptocurrency; it’s really a PayPal or a garden wall version of crypto pegged to a basket of fiat (government-backed) currencies and supported by some of the world’s biggest financial brands including Visa and Mastercard. Libra’s assets managed by an independent Swiss trust, the Libra Association, which Facebook would be just one voting member of.
Facebook sees Libra as an evolution of PayPal: simpler to set up, more ubiquitous, more efficient with fewer fees, more flexible thanks to developers, and longer lasting due to its cryptocurrency infrastructure.
Why would rival payments services providers get involved?
Because they can see the writing on the wall for credit and debit card transaction fees and would rather be inside the tent, so to speak.
Where do you buy Libra coins?
You buy Libra coins using real money and then store them in Calibra – Facebook’s own digital wallet – or some other space, and then use libras to pay for things as you would normally.
Why does Facebook want to create its own currency?
Facebook says it does not plan to make any money off Libra; in the short term, it has no plans to lend credit, for example. However, it can see the opportunity if small businesses who sell through Facebook online could see how much they’re selling to people who use Libra, which would then in turn see SMEs spending more on advertising through Facebook, which remains the world’s most highly targeted advertising platform.
David Marcus, Facebook’s vice-president of blockchain, said: “If more commerce happens, then more small businesses will sell more on and off platform, and they’ll want to buy more ads on the platform so it will be good for our ads business.”
Who is Libra aimed at?
In truth, it’s aimed at customers in developing countries, not the West.
Most of Facebook’s 2.4bn users, and the 1.5bn users of Facebook-owned WhatsApp, live in developing countries.
India is WhatsApp’s biggest market, with more than 300 million users. There are 120 million WhatsApp users in Brazil. In those two countries, 80pc of small businesses use WhatsApp as part of their business activities, such as exchanging bills and receipts with customers and suppliers.
Also, the cost of sending currency back home to third-world countries is punitive – 7pc on average for every transaction. Being frictionless, Libra puts that money in the (digital) wallet of, say, a Pakistani construction worker in UAE sending money home to his family in Lahore.
What are the advantages for small business owners?
First, zero transaction fees.
UK retailers currently pay card services such as Visa and Mastercard between 1pc and 3pc on each debit or credit card transaction, plus your bank charges another 0.2-0.3% of each card sale, as well as the payment provider charging a transaction authorisation fee of between 1p and 3p on each sale, as well as a monthly PCI compliance fee. Libra would do away with all that. So, Libra would be an attractive alternative to conventional card transactions.
Also, Libra is being set up to handle micro-payments, which are not worth the while of the major card platforms, so this could be a godsend to publishers who want to sell articles on a per-read basis or a YouTube that wants to charge for short videos like a jukebox.
What are the disadvantages for small business owners?
Not disadvantages as such, more like resistance to change. Given that 40pc of the UK’s micro businesses do not accept card payments, they might be resistant to adopting a currency whose value fluctuates against the pound.
And then of course there is the wider question of how many customers will adopt Libra, given Facebook’s highly publicised selling of data to controversial business Cambridge Analytica, which, it is alleged, manipulated the US election and UK Brexit Referendum through the social platform’s users. Given the company’s carelessness when it comes to people’s personal information, how many customers would be willing to give the advertising giant their hard-earned cash as well?