Facebook has announced the development of a digital currency, Libra (cf. “Facebook Libra — Liberator or Trojan Horse”1 ) and Walmart has filed a patent application for a digital token (cf. patent application2). Both initiatives rely on blockchain technology. The two companies have multiple rationales for launching or planning such initiatives. In this blog post, we explore their claims toward financial inclusion.
Facebook has stressed in the Libra white papers its objective of improving financial inclusion globally. And Walmart’s patent application’s introduction, stresses that: “The cost of having little money is high because of frequent short-term borrowing, accumulated interest on short-term borrowing that becomes long-term, high bank fees proportional to wealth, high credit card fees, and high payday loan interests…. Providing digital currency based on blockchain may overcome the drawbacks associated with the low-income households”
Having more companies try to address financial inclusion is positive and across all markets. Mature banking markets such the US also have to deal with a financial services access gap. The FDIC National Survey of unbanked and underbanked Households (cf.https://www.fdic.gov/householdsurvey/) estimates that in 2017 there were 8.4m unbanked (no account at an insured institution) households and 24.2m underbanked (checking or savings account only with insured institution), in the USA.
However financial inclusion is not the main objective of Facebook and Walmart and each company’s initiative could have unintended consequences on unbanked and underbanked customers.
For example, in the case of Libra, the reserve3 is expected to contain “a collection of low-volatility assets, including bank deposits and government securities in currencies from stable and reputable central banks.” This is unlikely to include the assets native to some of the emerging markets that may lack a stable currency in the first place (and whose customers could in theory benefit the most from a new digital currency). And this has implications in terms of monetary policy. It will dilute the impact of the quantitative easing policy of a domestic central bank, as well as increase capital outflows. And in turn this will limit the amount of capital available for investments to support local infrastructure development.
Walmart has been active in providing alternative payment and account solutions to underbanked, such as prepaid accounts. However mentioning financial inclusion is an opportunity for Walmart to move the debate toward the fees charged by banks and card networks. A Walmart token would reduce the cost of payment acceptance (by canceling merchant service charge since payments will be “on-us”).
In theory some of the savings generated could be transferred to the customer, and for example encourage the customer to save more (via rewards or higher interest rates on deposits). But clearly this will demand that Walmart lacks a banking license and they failed to acquire one in the past4. And this would be needed to deliver impactful banking services to unbanked and underbanked. That said, could a digital wallet containing Walmart tokens and receiving reward tokens at the end of given period be considered by the regulator as a deposit account?
Furthermore there is no guarantee of such a value transfer and whether the potential payment system will be cheaper to launch and manage. One issue for unbanked and underbanked customers is that the adoption of the Walmart tokens risks making them dependent on Walmart and its partners. This is positive for Walmart, increasing the velocity of the Walmart token inside the new monetary walled garden, and reducing cost of payment acceptance as well as data collection. However, for customers, this risks limiting their ability to engage with other financial providers, build a credit score and get more independent financial advice.
This raises key questions in terms of what user and community (and local economy) dependency will result from using such tokens promoted by organizations driving their core operations and using financial inclusion as part of their marketing toolkit. Financial inclusion is a lofty goal and tokens are powerful tools to provide access to finance and nudge customers to take better financial action and avoid tunnelling5 . However having two large multinationals consider such tools should be viewed with skepticism.
1 Facebook Libra — Liberator or Trojan Horse – https://www.gartner.com/document/3955992?ref=solrAll&refval=227836041&qid=3abcb0dcd879fbe5386eb4f5e4
2 Walmart patent application – http://appft.uspto.gov/netacgi/nph-Parser?Sect1=PTO2&Sect2=HITOFF&p=1&u=%2Fnetahtml%2FPTO%2Fsearch-bool.html&r=1&f=G&l=50&co1=AND&d=PG01&s1=20190236564&OS=20190236564&RS=20190236564#Cite_@inthepixels
3 The Libra Reserve – https://libra.org/en-US/about-currency-reserve/#the_reserve
4 Wal-Mart Abandons Bank Plans – https://www.nytimes.com/2007/03/17/business/17bank.html
5 Scarcity (psychology of) – https://www.behavioraleconomics.com/resources/mini-encyclopedia-of-be/scarcity-psychology-of/
Christophe Uzureau is a Vice President at Gartner. He is a co-author of a new book: The Real Business of Blockchain: How Leaders Can Create Value In A New Digital Age.