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“When I think about all the different ways that people interact privately, I think payments is one of the areas where we have an opportunity to make it a lot easier. I believe it should be as easy to send money to someone as it is to send a photo." – Mark Zuckerberg, F8 Conference April 2019
Calibra, Facebook's new subsidiary, aims to provide financial services on top of the Libra network. Calibra's first product will be a digital wallet that stores the Libra cryptocurrency, and can connect to the Libra blockchain. According to Facebook, the wallet will be available in both Messenger and WhatsApp, with a standalone app expected as well. Facebook plans to launch Calibra sometime in 2020.
Marketed as a way to "bank the unbanked," Facebook - and the initial Libra Association founding members - are hoping the service can help bridge the gap for the billions in the world shut out of the banking system, leveraging a permissioned-blockchain based network to enable low-cost payments and faster cross-border transactions, like remittances.
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Other Calibra details to note include:
- As a provider of financial services, Calibra will be regulated accordingly - which is one of the reasons for structuring as a subsidiary
- The Libra Association is separate from Calibra and Facebook
- An emphasis on privacy (are we surprised?), Calibra won't share account information or financial data with Facebook or third parties, without consent - aside from "limited cases"
- Those limited cases may include: regulatory compliance, AML and fraud prevention, performance data, and data sharing with payment processing and other service providers to complete the transaction
- Regardless of whether local governments apply AML laws to crypto wallets, Calibra intends to perform AML/CFT wherever the product is available - Calibra won't be available in jurisdictions that have banned cryptocurrencies
- Calibra will require ID verification and KYC to gain access to a wallet
- Calibra will release a comprehensive data policy prior to launch
Facebook's prior payment attempt to 'rule the world' was well received, but fizzled within 15 months
It's been just over a decade since Facebook's last foray into digital payment solutions, with its former attempt known as Facebook Credits.
Credits was a program that allowed the purchase of an in-platform token with a credit card/PayPal ($1 = 10FB credits) in order to use as a currency for paid applications and in-game items. Over time the virtual currency transitioned to direct $1:$1 digital fiat.
The business model of this product mirrored Apple or Google’s App developer revenue share where the distribution platform of the applications took a percentage of the total purchase. In FB Credits’ case, Facebook took 30% of the developer revenue.
Facebook Credits met with initial success in a pre-mobile environment where Facebook could still maintain hold of its desktop platform (vs. mobile application running on iOS or Android). FB Credits generated ~16% of the company's revenue in 2012 and $0.80 in global payment Average Revenue Per User (ARPU), Barclays Internet Analyst Ross Sandler wrote in a research note released in March.
By the end of its Alpha roll-out, The New York Times reported that Facebook was eyeing ~$835 million worth of virtual items purchased via Credits and that "the social network company is laying the groundwork for its second act: a virtual currency system that some day could turn into a multibillion-dollar business." Media was on-board with the narrative, touting that Facebook Credits would enable micro-payments and fuel its application developer ecosystem.
While FB credits generated strong top-line revenue, one of the core problems with the product was the fact that Facebook had to give back a majority of that revenue to cover payment processing fees, largely interchange fees or the cost of running transactions over debit and credit networks like Visa and MasterCard.
Considering fees charged by networks start anywhere from $0.10 minimum with an additional tack-on percentage of the total purchase value, and because the majority of in-game transactions were higher volume “micro-payments,” the profitability of the business never truly took off, and Credits was removed from Facebook by 2013.
Source: The Block, Autonomous Research
Current Examples of US Interchange Fees
Source: Host Merchant Services
This time they have outside, incentivized help
The analog between Credits and Libra stops at an underlying desire for lower-cost payments within a closed-loop stack. In fairness to the Libra Association — and by extension Facebook's positioned asset Calibra — the ambitions of these projects are much grander than the ability to buy items for your Farmville character. Unlike Credits "marquee" partnership to place pre-loaded cards within Targets, the Libra Association has backing from the likes of some of the world's most prominent payment names, VC funds, E-commerce, non-profits, and recently IPO'd ride hailing companies Uber and Lyft.
Source: The Block, Libra Association
Forgetting Facebook's 2.3 billion-plus monthly active user base for a moment, the impact of bringing on Founding Members with user bases that collectively add up to over 3 billion globally strengthens the user side of payments' two-sided market. Facebook maintaining just 1% of voting power once the network is live should also help alleviate the concern of this being just "Facebook's coin". Whether the $10 million entrance fee to have skin in the network (members will receive Libra to use to drive adoption) is enough of an incentive for these initial partners to actively push for merchant acceptance within their own organizations remains to be seen.
At the very least you'd have to imagine the VC partners like a16z and USV will push Libra within their portfolio companies where applicable. It'll also be interesting to see if some of these members on the payments side decide to explore servicing opportunities either via on-ramps or on the payment processing side. While fee structures are not explicit in the whitepaper and FAQs, it's implied that Libra is welcoming businesses to explore building on top of the network with the potential to take some fees (separate from validators' fees) along the value chain.
Judging who has the most to gain from a lower-cost payment play within this consortium (which to me, has visions inspired by the original payment interbank alliances that were formed in the late 60s/early 70s that would be become Visa and Mastercard today), at first glance I'd have to side with Uber and Lyft, given how large of an impact credit card processing fees are on both businesses. Uber last year had more than $43 billion worth of card volume processed (according to the S1), which likely translates to over $1 billion in card processing fees in 2018. Lyft also mentioned in its listing documents the intention to lower payment processing fees and the possibility of creating their own payment product.
The Opportunity within Remittances
"We believe that global, open, instant, and low-cost movement of money will create immense economic opportunity and more commerce across the world." ~Libra Whitepaper
According to the World Bank, in 2018 remittances to low- and middle-income countries reached record highs of ~$530 billion, a 10% increase from the year prior. Grouping in transactions to include high-income countries, global remittances saw just under $690 billion in volume in 2019.
Given the global average cost of sending $200 was an estimated 7% in the first quarter of 2019 (World Bank), while banks charged an average 11% in fees, Facebook and the Founding Members of the Libra association believe the potential is there to service this function at a significantly lower cost point.
The market seems to have taken notice, as the world's largest global remittance company Western Union saw its shares open down 3% on the news of Libra targeting cross-border remittance use-cases, and is still trading 2% below yesterday's close as of writing.
Interesting to note, while the Libra network is encouraging outside wallet providers to develop services for the network, Facebook's Calibra has noted that its digital wallet will not be available in jurisdictions where cryptocurrency is currently banned by regulators. That would imply that last year's top-two remittance recipients corridors, India ($79 billion) and China ($67 billion), would be blocked off from Calibra's rails.
A path towards accelerating digital wallet adoption and enabling new wallet tools?
"Any consumer, developer, or business can use the Libra network, build products on top of it, and add value through their services." Facebook in a conversation with The Block
Another opportunity set that jumps out from the Calibra announcement is the ability for Facebook to boost digital wallet adoption both in the US market and abroad.
Digital wallets can offer traditional consumer-banking functionality, such as checking and savings type offerings, payments, lending, asset management, and even insurance, all bundled into a low-cost offering at scale. From the perspective of the company offering the product, digital wallets offer a highly attractive customer acquisition cost; asset manager ARK Invest assumes digital wallets can acquire new customers for as little as $20. While digital wallets have exploded in popularity in China via Alipay and WeChat, and in emerging markets, usage in the U.S. has been relatively muted due to the presence of well-established banking franchises and infrastructure.
However, more recent product entrants in the U.S. such as Square's Cash App and Venmo have begun to see significant digital wallet growth acceleration. The two payments applications combined had ~20 million users in 2017, and has doubled that number to 40+ million active users. Looking ahead to Calibra, the ability to leverage a 2.3+ billion monthly user base with a product that has proven to be a hyper-efficient and cheap customer acquisition tool (e.g. cash tag, payment feeds, etc.) could position Facebook's Calibra to become one of the top financial services by number of U.S. digital users (mobile banking, or digital wallets). Assuming a U.S. active user base of ~170 million people, a 5% penetration rate in 2020 would put Calibra at #7 largest by active digital users, right behind Cash App. Open that 5% penetration to its ~2.3 billion monthly active global user base and its over 110 million digital wallet accounts (more comparable to the ~130 million Apple Pay wallets, which are installed and counted on every phone sold).
Source: ARK Invest, Corporate reports; note PayPal which own Venmo not included. Active users defined as active in past 12 months
As for product offerings within the Calibra wallet, the announcement gives examples of other feature-sets Facebook is exploring on top of the payment wallet, including lending opportunities, portfolio management tools (PFMs), QR purchase capabilities, and even contactless payment solutions for metro cards.
What's interesting about these given examples is the hint that the wallet could have access to Level 3 transactional level data (assuming the merchant on the other side of the transaction has the same wallet), or visibility into not just where and how much you purchased, but also an itemized receipt of the items that you purchased at a specific merchant.
To be clear, Facebook hasn't confirmed that this is the case or the intention to leverage this level of data. In fact, the Calibra data policy says they won't share data with Facebook or third parties, nor will they use data to improve on ad targeting (outside of "limited cases" - more on that later). However, it's not that hard to imagine a true digital wallet that offers you these capabilities, and in turn provides the user value-additive services such as personal finance tools, smart coupons and discounts, and even ad-driven rewards that send a small amount of Libra to your wallet after watching (see a16z video: the future of the mobile wallet) - even if the data is getting stored somewhere.Source: The Block, a16z: "The Future of the Mobile Wallet"
Pulling up, I'm curious to see what other businesses look to build services on top of Libra, and whether those businesses end up being crypto-native, consortium members, or a mixture of both. Within Calibra, Facebook told The Block that it "look[s] forward to making Calibra interoperable with other apps and financial service providers that offer complementary services."
One clear complementary opportunity I see is for lending services to explore the ecosystem, whether that's integrating directly into Calibra or another Libra digital wallet and offering loans at the PoS, or even just facilitating loans denominated in Libra. BlockFi, a NY lending company that takes deposits and lends on crypto, told The Block that it is bullish on asset backed stablecoins in general, and "would look to support Libra in the same way we currently support GUSD: as an asset you can earn interest on, as a loan disbursement mechanism, and as accepted collateral for crypto loans."
What's in it for Facebook?
"We believe this may prove to be one of the most important initiatives in the history of the company to unlock engagement and revenue streams."
RBC Internet Analyst, Mark S.F. Mahaney in a June 13 note
In the Thompsonian sense, aggregating your billions of users' financial data really is a checkmate from a value standpoint as a leading advertising-based business. The core issue, however, from a revenue monetization standpoint, is can they get away with it? Based on initial messaging, the company has (to be fair what else are they supposed to say?) repeatedly expressed the separation of its subsidiary Calibra from the legacy Facebook assets. But you can't help but wonder if there are loopholes to their commitments on no sharing of data back to Facebook or third parties - like this weird clause in their Commitment Statement that states they share data with all payment processors and service providers when you authorize a payment.
Outside of monetization of data, the next best option for Facebook would be to position Calibra to be THE mobile wallet for the Libra system, and leverage the financial services that could be enabled within. Outside of targeting global cross-border remittances, prioritizing Asia-Pacific seems to be the next best low-hanging fruit, given: almost 4x as many Monthly Active Users (MAUs) as North America, larger demographics already comfortable with digital wallets, and more than double the amount of annual purchase volumes still runs through card networks (~13 trillion).
Source: Nilson Report, The Block
Questions we still have
From a payments cost perspective, will this actually be cheaper to transact on vs. other p2p options?
Payments are already relatively low-cost, you pay for value-added services like rewards, insurance, chargebacks for fraud, etc. Encouraging service and business providers to come to the network and mentions in the Data Commitment report of sharing data with payment processors and service providers suggest Facebook expects these businesses (that take fees for their service) to be on the network. Factor in the cost to on-board into the system through crypto exchanges and there's a chance that the costs for larger-ticket items via the card networks vs. Libra network could actually be comparable. Granted, leaving off the flat $.10+ fee no matter the ticket size that comes with the major networks could allow for affordable micro-payments.
Assuming fees are lower than the networks', how will the Association fund rewards?
From our understanding with conversations with Facebook, the funds the association has raised from both Founding Members and additional accredited investors, both of which will receive Libra Investment Tokens (an STO) which will generate interest on the reserve assets, and will be paid out to those that hold the Libra Investment Token. Additionally, money raised from this sale of LIT will be converted to Libra, and used by the association to fund incentive rewards, and social impact grant-making initiatives. According to Facebook the amount of incentives any one wallet or merchant can receive will be capped, and these merchants can keep or pass these rewards to the consumer if they so choose. The question is, what happens when the set Libra funds used for incentive programs get used up? Will the network then look to use transaction fees (similar to interchange) to fuel future rewards?
Given the open-source of the Libra Blockchain, will Calibra compete against other wallet providers?
Facebook has reiterated that any company will be free to build business and wallet services on the network. From this perspective, we wonder if you could see one of the payments players (like Paypal) look to develop a wallet or service that can store and process the Libra cryptocurrency.
What regulatory issues are at play?
FinCEN's recently issued guidance in May on Application of FinCEN’s Regulations to Certain Business Models Involving Convertible Virtual Currencies, reiterates that a cryptocurrency business might be engaged in money transmission, which is defined as receiving value and transmitting that value to another person or location. While Calibra filed for inclusion as MSB registrant, we wonder if there are other regulatory compliance issues (GDPR, PSD2, etc.) they have yet to work out. Could Facebook look to insure funds custodied in the wallets? And then there's this that just hit the tape: U.S Rep. Maxine Waters calling for a halt in Facebook's development of its cryptocurrency.
Source: FinCEN MSB Registrant Search: # 31000141265767
What are the logistics of the unbanked getting on-ramped into the system?
Presumably, the majority of unbanked don't have access to the banking system due to a lack of proper state issued ID. Given Calibra will have to KYC all users into the system, how will they work around this issue?
A look at Facebook's Blockchain team
Facebook publicly announced that it had formed a new team dedicated to blockchain technology in May 2018, led by David Marcus, the former head of Facebook Messenger. Facebook played an instrumental leadership role in the build out of the Libra Association and the Libra Blockchain, working with other Founding Members leading up to the initial announcement. While association governance is spread across its members, Facebook expects to maintain its core leadership role through 2019, and up until the Libra network officially launches.
We've analyzed the number of Facebook employees working on 'Blockchain' via LinkedIn profiles. Of note, the average duration for working at Facebook on the blockchain team is 2.1 years, while the average age of blockchain employees is 36.7 years. The bulk of the Blockchain sits within Engineering, Business Development, and Research roles.
Source: The Block, LinkedIn
The Facebook Blockchain Leadership Team
David Marcus is the vice president of blockchain at Facebook. In May 2018, Facebook publicly announced that David Marcus would lead its blockchain efforts. Prior to leading the Facebook blockchain team, Marcus was the head of Facebook Messenger. Before joining Facebook, Marcus was president at PayPal. Marcus also founded Zong, a mobile payments company in 2008, which was acquired by PayPal for $240 million.
Kevin Weil is the vice president of product at Facebook’s blockchain team. Prior to joining the Facebook blockchain team in May 2018, he was vice president of product at Instagram. Weil also held senior roles at Twitter, where he was responsible for product, product marketing and design for Vine and Periscope, as well as Coolris, where he was its engineering lead.
Tomer Barel is vice president of risk & operations at Facebook’s blockchain team. Prior to joining the Facebook blockchain team in May 2018, he was an executive vice president at PayPal. Barel was also the vice president of business development at 3DV Systems, a video imaging technology firm, and an associate at McKinsey & Company, a consulting firm.
James Everingham is the head of engineering at Facebook’s blockchain team. Prior to joining the Facebook blockchain team in May 2018, he was the head of engineering at Instagram. Everingham also held senior roles at Yahoo and Luminate.
Christina Smedley is the head of brand & marketing at Facebook’s blockchain team. Prior to joining the Facebook blockchain team in May 2018, she managed communications for Facebook Messenger. Smedley also held senior roles at PayPal and Edelman, a marketing and advertising firm.
Morgan Beller is the head of strategy at Facebook’s blockchain team. Prior to joining Facebook, Beller led corporate development & strategy at Medium. Beller was also a partner at Andreessen Horowitz and a product manager at eBay.