Will Facebook’s relaunched digital wallet change the future of payments?

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Facebook has taken a big step towards launching its long-delayed digital wallet. The company’s chief financial officer said in mid-August that the tech giant was ready to activate its Novi wallet and believed it could address the concerns of all regulators.

As the pandemic further digitizes financial services, there is an urgent need for cheaper, interoperable and more accessible digital payments, said David Marcus, head of the financial services unit at Facebook.

“Novi is ready to hit the market. It is regulated and we are confident in our operational ability to exceed the high standards of compliance that will be required of us, ”said Marcus.

A small portfolio with large-scale potential

Novi is a digital wallet that will use its own crypto payment system, called Diem. It is rooted in Libra, Facebook’s first blockchain-based payment system that was suspended amid regulatory scrutiny when it was announced in June 2019. At the time, regulators and central bankers were concerned about this. undermines sovereign currencies and allows money laundering. The original digital wallet associated with the Libra cryptocurrency was called Calibra. It was renamed Novi in ​​mid-2020.

But Facebook says things are different now. Novi is a small-scale project overseen by an outside non-profit group, the Diem Association, which is seeking the necessary government approvals. Novi will allow users to add money to their wallet which will then be converted into a Diem digital currency that can be sent to others or used to make purchases.

Second round:

As some had predicted, Facebook hasn’t given up on its mobile wallet. Now with an American banking partner, it is ready to switch.

As part of the original plan, the value of the Libra coin was to be compared to an assortment of more stable global currencies, with a single Libra worth roughly the same value as a dollar. Novi, as Marcus explained, is a stable coin pegged only to the US dollar. (Unlike Bitcoin, where the price fluctuates, a stablecoin stays at the rate of the currency to which it is pegged.)

Mobile wallets are no longer a new thing, but Facebook has three billion users worldwide and the potential to drive things on a scale that could drive mass adoption. The fact that the tech giant already has money transfer licenses in almost every state and brings billions of “pre-authenticated KYC” users is a huge development, said Richard Crone, CEO of Crone Consulting. The financial brand.

“They are ready to go,” Crone says. “They can get started here with Diem USD and then roll out new payment systems in 160 other countries. This is a big step forward for the larger financial services market.

Facebook says the unbanked are a key market

In a detailed article on Medium, David Marcus wrote that it is “time to change our failing payment infrastructure” because existing systems are expensive, slow and not interconnected. He points to 1.7 billion unbanked people in the world, including 62 million Americans, who are left behind in the current system and “stuck in the money economy.”

On average, legacy payment systems cost consumers 6.5% with end-to-end payment times that can span up to three days, Marcus argues. As the pandemic has accelerated the digital switchover and the transfer of money around the world, the need for such a wallet is even greater, he said.

Of course, Facebook ultimately cares about itself and its shareholders. But the fact that it now brings Novi to the market with such a huge social benefit may make it even more attractive to regulators around the world. “What could be more significant from this point of view? said Crone. “Facebook can say that every life counts and we are going to give them access to the financial system.”

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Digging into the details of Novi

Facebook is already a major player in the payments industry. Facebook payments have supported more than $ 100 billion in transactions over the past year and are used in more than 150 countries with 55 currencies, Marcus said.

But Novi is different because it brings the bank in-house with a whole new system. The Diem Association, through its subsidiary Diem Networks US, announced in May 2021 that Silvergate Bank, a California state chartered bank, will become the exclusive issuer of the Diem USD stable coin and manage the Diem USD reserve. . Silvergate specializes in serving the digital currency industry. Along with the announcement of the partnership with Silvergate, Diem said it would simplify its plans by moving operations from Switzerland to the United States.

“We are committed to a secure payment system for consumers and businesses that makes payments faster and cheaper, and leverages blockchain technology to bring the benefits of the system to more people around the world. financial, ”said Stuard Leve, CEO of Diem. , in the May announcement.

What this means:

The potential game changer with Novi is Facebook’s ecosystem of 90 million businesses and 3 billion pre-authenticated consumers.

While supporting P2P payments would already be a revolutionary development, the real change would be the adoption by merchants of the Novi Wallet within the Facebook ecosystem. Facebook would instantly open the door for over 90 million businesses on its platform that could accept US Diem and trigger the use of currency and crypto in general. “With pre-authenticated users, this will create a registered user base that will pollinate everything Facebook has. This paves the way for a basis for a great app, ”says Crone.

Sailing smoothly? Probably not

Even though Facebook now has the product, the infrastructure and the ambition to bring Novi to market, obstacles remain. The first is a non-cooperative banking sector other than Silvergate. it’s understandable that the industry fears and hates the idea that Facebook is digging deeper into financial services. It’s possible that the digital wallet and new payment system will lay the groundwork for a future where Facebook offers loans, deposit accounts, and more. The company also announced in August that it was teaming up with an online lending company in India to provide loans to small businesses.

Second, regulators are not only skeptical of Facebook, but stablecoins as well. The President’s Financial Markets Task Force, a watchdog team led by Treasury Secretary Janet Yellen, has expressed concern that stablecoins are too large and are often used to facilitate transactions. illegal transactions.

Still, David Marcus believes Facebook can alleviate many of the concerns of regulators. He says using a stablecoin backed by individual cash reserves offers stronger protections for consumers and provides faster access to funds than traditional bank accounts. Marcus says it’s also a misconception that digital assets are anonymous, and when configured the right way, digital portfolios put customer due diligence at the center of the approach.

It also doesn’t hurt that the tech giant is bringing Novi to the market on a mission to cater for the unbanked. In fact, Facebook says it won’t initially charge person-to-person payments (even across borders) and currently has no plan to monetize Novi.

“We will continue to persevere and demonstrate that we can be a trusted player in this industry – and one that brings positive change by being in it,” said Marcus.

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