Europeans and Americans have their Visa and Mastercard. For everyone else, here it comes … Libra?
Libra’s new digital currency on Facebook is targeting a huge potential market for financial services – the entire developing world, with billions of people in areas like India and Sub-Saharan Africa, where financial services are often less sophisticated and many people they do not use traditional bank accounts.
Whether or not these billions will want to make the switch is anyone’s guess.
The United States, Europe, and more developed economies already have large and efficient payment systems. These allow people to buy and sell products in real time and send money person-to-person through services like Zelle, PayPal, and Venmo. That’s why companies that joined Facebook’s Libra association, as well as nonprofits involved in similar projects, say that Libra’s potential lies elsewhere.
In developing countries, many tens of millions still live far from a bank or money transfer center or currently use a currency prone to inflation or volatility. Libra could address this problem by providing a universal and stable currency that is easily transferable between people or businesses without the need to set up a complete payment infrastructure. It could also potentially work at a lower cost.
In the past decade, citizens of developing countries have widely adopted cell phones as a way to store money, sending text message-based payments to businesses or individuals. It has been a widely heralded development among policy makers and poverty-focused nonprofits because bank accounts are hard to come by or too expensive.
“The entire African continent skipped cards and went straight to mobile payments,” said Sanjay Sakhrani, an industry analyst at Keefe, Bruyette & Woods, which covers Visa, Mastercard, PayPal and Western Union.
But these payment systems are often limited by the type of cell phone operator each person uses. It is not uncommon in places like Africa to carry multiple cell phones in order to have the necessary access to the correct money transfer system.
Libra could solve this problem by creating a universal currency that can be transferred across multiple cell phone networks and borders. There is also the issue of cost, which is cited by the World Bank as the biggest problem with financial systems outside of developed markets. Facebook says Libra would cost close to zero.
The Colombian border city of Cucuta is one of the places where Libra could make a difference.
Every day thousands of Venezuelans in need cross into this sweltering city to buy food and medicine that are in short supply at home. For many, the first stop is Western Union, where they line up for hours to collect money sent by family members living abroad. The demand for cash remittances is so great that, in reality, migrants sometimes line up outside Western unions the night before branches open, sleeping on the sidewalk to keep their place in line.
Digital currencies could make it easier for these migrants without bank accounts to transfer funds and save hours of their time. Using them is also safer, says Typson Sanchez, a local software developer, because it prevents theft.
But despite its obvious benefits, merchants in Cúcuta have been slow to adopt digital currencies, with only a few accepting it today.
“Merchants worry about the volatility” of currencies like bitcoin, says Sanchez, a software developer and co-founder of Panda Exchange, the digital payments startup. Other merchants find existing digital wallets difficult to use and are concerned about their legality.
Sánchez hopes Facebook’s Libra can help overcome some of those hurdles. “They already have a very powerful platform with many users,” says Sánchez. “They will be able to reach ordinary people who are not interested in technology. And that is something that many companies have not yet been able to do.”
Vodaphone, the European-based cell phone operator, has a large presence in Africa and other developing countries and operates its own mobile wallet system known as M-Pesa. Vodaphone, which is already a dominant carrier in Africa, sees the potential in Libra to allow customers to send money across borders at a much lower cost.
There is a lot of room for improvement. According to the World Bank, the average fee for a cross-border remittance is around 7%, and places in sub-Saharan Africa charge up to 10% to send a money transfer.
Companies like Vodaphone and organizations involved with Libra like Mercy Corp and Women’s World Banking said they have come together at least in part to ensure they have a “seat at the table” should Libra take off as a payment method. Libra’s real-life use cases still have at least a year off, and are likely to be longer.
Some would argue that Facebook’s Libra is the wrong solution to the problem of accessing financial services in developing countries. In China, the dominant form of payment is WeChat and AliPay, two mobile applications that use messaging to send money to a company or another person, at extremely low cost. Both applications are used by more than one billion people.
“For me, that’s the simplest solution for developing countries,” said Nicholas Economides, an economics professor at the Stern School of Business, an expert in e-commerce and payment systems. “You don’t need to create a completely new currency. You just need the right application.”
There is a factor of “well, why not?” In the participation of these companies. Facebook requested a minimum investment of $ 10 million in Libra from its for-profit partners. For a company like Visa, which made more than $ 20 billion in revenue last year, Libra’s investment is a pocket change. In return, Visa gets insider access to Libra and its potential technologies, as well as a seat at the table.
Visa declined an interview request regarding its involvement in the project, but a spokesperson pointed to a blog posted by one of its executives on Tuesday, describing the company’s interest as reflecting “a spirit of openness and curiosity”.
Mastercard has been looking into the technology that underpins Bitcoin and other digital technologies for some time, said Jorn Lambert, Mastercard’s executive vice president of digital solutions. The company was drawn to Libra because it is private, unlike bitcoin that operates on an open network, and is backed by reserve currencies.
“This is something that could provide real benefits for the consumer, particularly in the developing world,” Lambert said.
Women’s World Banking, a non-profit organization focused on financial inclusion for women, especially in developing countries, also joined the association. WWB wanted to ensure that the issues of women in developing countries, who are often less tech savvy than their male counterparts, were addressed.
“Women are more than half of the unbanked population in the world. We wanted to be at the table to address the needs of women, “said Karen Miller, vice president of knowledge and communications.
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