The news last Friday that Facebook has plans to launch its own global crypto-based payments rails is déjà vu all over again.
Déjà vu because it was 10 years ago, in May of 2009, that Facebook launched the alpha version of Facebook Credits. Credits was a virtual currency and payments platform used to power in-app purchases on Facebook. It shut down in 2012, 15 months after its official launch.
And déjà vu because Project Libra, Facebook’s 2019 refresh of Credits – only this time with a fancier moniker – will very likely end the same way.
The notion that Facebook is going to launch and ignite a global payments network, at scale, based on its own branded cryptocurrency and achieve global merchant and consumer acceptance is as likely as the predictions a decade ago that bitcoin and blockchain would, by now, become the internet of money.
A Cryptocurrency Play in Three Acts
I have to admit to being a bit incredulous when reading the Wall Street Journal’s account of Facebook’s crypto-centric payments plans last Friday morning (May 3).
Between the claims that it will upend eCommerce worldwide, to the reporting that Facebook execs are literally passing the hat to raise money to fund it – from some of the very same players they plan to disrupt – my first thought was to offer my own point of view in the form of a fictional three-act play.
Something like this.
Act One: Facebook execs propose crypto/blockchain global payments rails to Facebook CEO and board.
The team presents Zuckerberg and the board with the plan to transform global payments via a crypto-powered, blockchain-based payments network. They acknowledge that the timing for this launch isn’t ideal, since it’s happening at the same time the company is being excoriated for data and privacy violations. And, in light of that, anything that even remotely smacks of crypto could seem a little tone-deaf, especially to the regulators, since no one but people in the Valley really get its value.
But keep in mind, they say: This plan also comes at the same time Facebook is being challenged by investors to figure out new ways to monetize their user base, which is what this is all about.
Zuck and the board have admired WeChat and their success – this plan will replicate that private, closed ecosystem, but even better. Yes, they know that WeChat with WeChat Pay doesn’t use crypto or its own rails, but they haven’t had much luck igniting outside of China. So there. And this plan is a way for Facebook to leapfrog them by using cool, modern tech and stablecoins tied to fiat currency – today’s hot payments play – and keeps them out of the bitcoin fray.
What people need to understand is that since Facebook connects a third of the world, they already know people trust them to keep their social connections strong. And despite the data and privacy scandals, their user base still shows growth. Integrating Messenger back into Facebook is the play for creating and launching a new global payments system they can own, run and control.
Listening intently, the executive team, now very much consumed by negotiations with the FTC and every other regulator in the world about how to be better stewards of consumer data, tells the team they have their blessing.
But not their money.
Go find your billion dollars elsewhere, they say. After all, they’ve only got $45 billion in the bank, and at some point will probably have to pony up $5 billion to pay the FTC and who knows how much to others at some point. So, they say, they’re not going to fritter away a billion dollars right now on this scheme.
Besides, it will give them air cover if the regulated, compliant and trusted rails invest in Project Libra. So, go forth and fundraise, they say – then, once Facebook gets that billion locked up, the board can talk about if they will throw anything onto the pile.
Act Two: Facebook execs hit the road with hat in hand and a $1 billion bogey.
First stop on Facebook’s capital raising tour: The big guns with successful payments rails, loads of money and a demonstrable appetite to invest in innovation.
In meetings with the CEOs of the existing card rails and the merchant solutions companies that serve them, a beautifully crafted, well-designed pitch is made to consider the investment – a pitch laced heavily with the tried-and-true FUD factor (fear, uncertainty and doubt) as the key theme.
Investing in Facebook’s rails is presented a sensible investment in their own creative destruction playbook.
Yes, the Facebook team tells these CEOs, they are motivated to create their own payments scheme, because they want to eventually cut them out of the payments flow. But that’s only because Facebook want to be nicer to the merchants and reduce how much they pay to accept payments. And, of course, Facebook knows that schemes based solely on merchant cost savings have failed in the past – they read PYMNTS and know the MCX and ISIS/Softcard stories by heart.
But their timing – and this scheme – is different.
And yes, they know how the CEOs feel about crypto and anything that even remotely smells of it. But as they are dabbling in distributed ledger tech and crypto, Facebook would like to help them out. Besides, this isn’t crypto in the true sense of the word. It is stablecoin, tied to fiat currencies – the very same plan JPMorgan Chase said they will use to move money internally, via the JPM Coin.
Does this sound a little self-serving? It does – after all, Facebook needs to figure out another way to monetize their asset, even if it means using investors’ money to help them cut the investors out of the payments flow at some point. But, they say, that’s going to happen anyway. After all, the card guys are nowhere in developing markets, and Facebook has a third of the world’s population in its network.
Act Three: Facebook execs meet with the Fed and central banks.
The scene shifts to the hallowed halls of the central bankers. Getting the blessing of the central banks is critical, and visiting those regulators is a critical stop on the regulatory and compliance march for any new payments network, never mind a global one based on a new, single cryptocurrency by a social network that has been in the regulatory crosshairs over the last couple of years.
Facebook execs tell central bankers to close their eyes and suspend disbelief for a few minutes.
Yes, this is the same company that enabled fake news, election tampering and numerous data and privacy leaks. But, they say, they have learned their lesson and have taken steps to correct those mistakes. And that should not interfere with being considered as a plausible, responsible, global monetary system that will move funds between billions of people every day, using a brand-new currency that Facebook will issue and control.
Curtain Call: The media goes nuts.
The play ends with a montage of media outlets talking about the upending of the entire global payments ecosystem in the face of Facebook’s innovative new global payments scheme, and how this spells the end of the line for all who have invested in laying those tracks.
Not just the traditional players, but PayPal, Amazon, Apple, Google, WeChat, Grab, Paytm – all of them – as well as the global money transfer players like MoneyGram and Western Union.
The caution to everyone: Better make hay while the sun shines, since those Facebook/Project Libra storm clouds will be rolling in soon.
Finally, they report, with this new use case, the critics of blockchain and crypto as global payments alternatives will finally be proven wrong. As for all those times Facebook tried payments and failed in the past? That was then and this is now.
And now, is pure wow.
But then I decided to bag that idea and be constructive instead.
The Facebook Credits Story
A decade ago this month, in May of 2009, Facebook launched the alpha version of Facebook Credits. Credits wasn’t called cryptocurrency, as at that time, the term hadn’t yet become a Silicon Valley buzzword and bitcoin hadn’t gone “mainstream.”
But it was the same concept: ditching fiat currency for Facebook-branded virtual currency to make in-app purchases on the social media platform. One dollar purchased 10 Facebook Credits.
The most popular use case for Credits? Social gaming.
For those of you who need a blast from that past, game developer Zynga launched on Facebook in 2009 with a game called FarmVille, which amassed 10 million daily active users in its first six weeks. Farmville was followed by CityVille, FrontierVille and a host of other social games hosted on the Facebook platform, as users spent plenty of money tending to their farms and homesteads. In 2010, spending on virtual goods inside those games and others like it – on and off the Facebook platform – was estimated at $15 billion, $1.6 billion of which came from the U.S.
After a beta launch in 2010, developers were told by Facebook in June of 2011 that the only way they could be paid for those in-app purchases was to accept Credits. That meant Facebook users had to buy Credits in order to make purchases in those apps. Zynga adopted Credits as its exclusive currency. Target even got on board, selling Facebook Credit gift cards in its stores.
Facebook Credit’s ignition strategy was more or less a brute force, take-it-or-leave-it approach.
Take a bunch of hooked social gamers and a captive audience of developers who wanted to make money, and tell them the only way they could do business was to use Facebook Credits, and that was how Credits got started. This “our way or the highway” strategy, they theorized, would create a critical mass of users flush with Facebook Credits who would then also want to use them with other merchants. More Credit-flush users would give more merchants on the Facebook platform a reason to accept Credits – and then it would be time to sit back and watch the network effects fly.
The media was breathless, too, over the impact Credits was expected to make on the more traditional payments ecosystem.
Credits, they reported, would become the de-facto micropayments platform for all purchases made on Facebook. Facebook, with Credits, would ignite the app economy. In time, it was said, Credits would become the way people paid for purchases at any retailer site that users logged onto using Facebook Connect.
Facebook fueled those media fires. It was reported in 2010 that the company expected roughly $835 million in purchases of virtual goods across the million or so apps on its platform would be done using Credits. Facebook Credits were positioned as being capable of not only marginalizing the traditional payments rails, but also disintermediating those that had already captured their share in online commerce: PayPal, Amazon and Google.
I recall having conversations at the time with several top payments company execs who were genuinely worried that the media hype was a foreshadowing of reality. With Facebook as the largest aggregator of human beings on the planet, what would happen if it caught on? And isn’t it only a matter of time before it does? If it succeeded, wouldn’t Credits put a big ding in their businesses?
Fifteen months after its official launch, in September of 2012, Facebook Credits was shuttered. Facebook told users that payments for in-app purchases would revert to their standard currencies and payments methods.
Facebook Credits turned out to be a big fizzle.
Longtime PYMNTS readers understood why: no critical mass, a flawed ignition strategy and, most importantly, no real problem solved.
Facebook had a lot of users then, but only a small sliver of them played games on the platform. In 2010, that number was roughly 20 percent of all users, with only a very small fraction ponying up money to buy stuff inside of those games. For diehard gamers, Credits was the only payments option in those apps, so they played along, so to speak.
Facebook was counting on those users to want to spend Credits on any of the one million apps on its platform – but they didn’t. The 80 percent of Facebook users who didn’t play games had no reason to set up Credits accounts to buy things, since they could use the payments methods they had always used and trusted.
Without a critical mass of consumer interest, merchants didn’t have much, either.
Credits failed for all the same reasons most every other payments scheme-in-waiting fails: because it had an acceptance, liquidity and consumer incentive problem. And, most importantly, it simply did not solve a problem.
Few people had an incentive to buy Credits. Few merchants outside of social games accepted Credits. Fewer gamers were interested in buying Credits beyond what they needed to play those games. There was zero incentive for non-gamers to even want to try. And consumers had other payments options they liked, trusted and used.
Cue the sound of the familiar payments platform ignition sputter.
But It Looks Great On Paper – and Sounds Great, Too
A lot of things look great on paper and sound even better – until the rubber actually meets the road.
And especially in payments.
Take digital wallets. Consumers’ love affair with the mobile device would automatically translate into their immediate embrace of using it as a replacement for plastic cards at physical points of sale.
Yet four years later, here we are. Acceptance and usage of digital wallets in physical retail outside of transit in cities like London remains anemic, despite claims to the contrary.
If that wasn’t true, there would be no need for players like Apple and PayPal to issue old-school, low-tech, network-branded plastic debit and credit cards that consumers trust and like to use – which merchants can immediately accept without any change to their POS systems.
In developing markets, mobile-first payments schemes like Grab and WeChat Pay and Paytm have ignited because they leverage consumers’ relationships with their existing (trusted) banks, their own domestic currencies and mobile apps that provide useful financial services and payments capabilities.
Even Facebook’s WhatsApp has plans to enable payments in India using existing bank rails.
Not a crypto or blockchain rail in sight.
Why the Stars Won’t Align for Project Libra
I wrote in January that 2019 would be a critical year for payments and commerce, since it is the bridge between the decade of the 10s and the 20s, when we will see innovation accelerate and digital transformation take root. I suggested that this was the year when tough decisions would have to be made about what needed to be left behind and what needed a doubling down.
I cautioned that one of the things that should be left behind is the notion that big-bang innovation – where everything must change all at once – is the ticket to creating the next big wave of innovation in payments and commerce.
Because there is overwhelming evidence that the kind of innovation that solves real problems doesn’t require innovators to force change across every single thing people and businesses do to get a platform off the ground.
Uber didn’t need new cars, or an Uber currency to get started and evolve into the powerful global logistics and mobility platform that it is today.
Square ignited because it leveraged the cards people already had in their pockets to pay for things that micro-merchants, with their Square dongles, could instantly accept.
Fortnite didn’t need a Fortnite-branded virtual currency to pull in a half a billion dollars on the iOS platform less than a year after it launched.
PayPal didn’t and doesn’t need PayPal currency to enable its users to send money and shop anywhere they want, including across borders.
Ditto MoneyGram and Western Union, both of which move money instantly to receivers in more than 200 countries.
Amazon isn’t asking people to use Alexa currency to get her shopping assistance.
Disbursements didn’t need new rails and a new currency to add value to senders and receivers. Instead, it leverages the debit cards people already have in their wallets to get instant access to money.
You get the point.
I will leave you with a couple of thoughts.
Merchants follow the lead of consumers.
Merchants will accept the method of payment consumers want to use. It’s always been that way and will always be that way. Consumers choose the method of payment they like and trust – with trust and choice being the operative words. And they trust their banks, and their card issuers, and intermediaries like PayPal and Amazon and Grab and WeChat and Alipay, to enable those transactions. They don’t care how much it costs merchants to accept those payment methods – and they never will. Merchants know this, which is why they accept cards.
That’s why it is still amazing to me that, in the face of all the incontrovertible evidence to the contrary, there are still so many innovators pitching new, consumer-focused payments schemes based purely on how much they are able to lower the costs of payments acceptance.
Time is a valuable currency in payments.
Today, there are well-established global, domestic and regional schemes that enable the movement of money between people and businesses.
Those networks are in place, they work and they are extremely hard to displace. Great ideas that are too late in the cycle simply won’t ignite, because change creates friction – particularly when that change doesn’t solve any problem for a consumer or business. It’s why I think that what I call remote payments – the use of apps and mobile devices to pay for and stage payments – will ultimately dominate contactless card payments at the physical point of sale in many of the same establishments where contactless can speed checkout, even though consumers like using their plastic cards. Consumers also like buying online and picking up in a store, when they can, as evidenced by the strong adoption of order-ahead and the use-cases it enables.
Finally, innovation has to solve a real problem for the end user.
Consumers and merchants have plenty of ways to transact today – and they do. Of course, things could always be better. Innovators are leveraging existing rails, not to mention the methods and assets consumers use and trust today, to solve their real payments problems.
Facebook has a lot of its problems of its own to address. Spending its time and energy trying to develop payments solutions that don’t solve the problems that most people have is, well, a puzzle. Then again, maybe that’s why Facebook has kept the crypto payments team so small. And why they’ve told the team to hit the road to raise money – from anyone else but them.
With a plan that probably looks pretty good on paper.