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Will Facebook’s newly launched digital wallet change the future of payment?

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Facebook has taken a huge step towards launching its long-delayed digital wallet. The company’s head of financial services said in mid-August that the tech giant was ready to turn on its Novi wallet and believes it can address concerns from all regulators.

As the pandemic continued to digitize financial services, there is an urgent need for cheaper, more 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 that we can exceed the high compliance standards that are placed on us, ”said Marcus.

A scaled-down wallet with the potential for long range

Novi is a digital wallet that uses its own crypto payment system called Diem. It has its roots in Libra, Facebook’s first blockchain-based payment system, which was subject to regulatory scrutiny when it was announced in June 2019. Back then, regulators and central banks were concerned that it would undermine national currencies and make money laundering possible. The original digital wallet paired with the cryptocurrency Libra was called Calibra. It was renamed Novi in ​​mid-2020.

But Facebook says things are different now. Novi is a scaled-down project and is overseen by an outside not-for-profit group, the Diem Association, which is getting the necessary government approvals. Novi allows users to deposit funds into their wallets which is then converted into digital Diem currency that can be sent to others or used for purchases.

Round two:

As some have predicted, Facebook hasn’t given up on its mobile wallet. Now with a US banking partner, it’s ready to rock.

The original plan was to compare the value of the Libra coin with a number of more stable global currencies, with a single scale being worth roughly as much as a dollar. As described by Marcus, Novi is a stablecoin that is only pegged to the US dollar. (Unlike Bitcoin, where the price fluctuates, a stablecoin stays at the rate of the currency it is pegged to.)

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Mobile wallets are hardly a novelty anymore, but Facebook has three billion users around the world and the potential to move things forward on a scale that could drive mass adoption. The fact that the tech giant already has money sender licenses in almost every state and brings billions of “pre-authenticated KYC” users to the table is a huge development, said Richard Crone, CEO of Crone Consulting The financial brand.

“You’re good to go,” says Crone. “You can start here with Diem USD and eventually introduce new payment systems in 160 other countries. It’s a big step for the broader financial services market. “

Facebook says the non-banks are a key market

In an extensive post on Medium, David Marcus wrote that “it is time to change our broken payments infrastructure” as existing systems are expensive, slow and disconnected. It points to 1.7 billion people without bank accounts around the world, including 62 million Americans, who are left behind in the current system and “stuck in the cash economy.”

On average, older payment systems cost consumers 6.5% with end-to-end billing times that can be as long as three days, claims Marcus. As the pandemic has accelerated the digital transition and global money transfer, the need for such a wallet is even greater, he said.

Sure, Facebook ultimately takes care of itself and its shareholders. But the fact that Novi is now being launched with such an important social benefit could make it even more attractive to regulators around the world. “What could be more sensible from this point of view? says Krone. “Facebook can say that every life is important and we give them access to the financial system.”

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Immerse yourself in the Novi details

Facebook is already a big player in the payments space. Facebook Payments supported more than $ 100 billion in transactions last year and is used in more than 150 countries with 55 currencies, Marcus said.

But Novi is different because it brings banking into the house with a whole new system. The Diem Association, through its subsidiary Diem Networks US, announced in May 2021 that Silvergate Bank, a California-chartered bank, would become the exclusive issuer of the Diem USD Stable Coin and manage the Diem USD Reserve. Silvergate specializes in serving the digital currency industry. At the same time as announcing the partnership with Silvergate, Diem announced that it would simplify its plans by relocating operations from Switzerland to the United States.

“We are committed to a payment system that is safe for consumers and businesses, makes payments faster and cheaper, and uses blockchain technology to take advantage of the financial system for more people around the world,” said Stuard Leve, CEO von Diem, in the May announcement.

What it means:

The potential game changer with Novi is the Facebook ecosystem with 90 million companies and 3 billion pre-authenticated consumers.

While the support of P2P payments would already be a groundbreaking development, the acceptance of the Novi wallet by the merchant within the Facebook ecosystem would be the real game changer. Facebook would instantly open the door to more than 90 million companies on its platform that could accept US Diem and ignite the use of the currency and crypto in general. “With pre-authenticated users, an entire registered user base is built up that pollinates everything else that Facebook owns. It forms the basis for a super app, ”says Crone.

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Smooth sailing? Probably not

Even if Facebook now has the product, the infrastructure and the ambition to bring Novi to market, hurdles remain. First is an uncooperative banking sector apart from Silvergate. It’s understandable that the industry dreads and hates the idea of ​​Facebook digging deeper into financial services. It is possible that the digital wallet and new payment system will lay the foundation for a future where Facebook will offer loans, deposit accounts, and more. The company also announced in August that it is partnering with an online lending company in India to provide small business loans.

Second, regulators are skeptical not only of Facebook, but also of stablecoins. The President’s Working Group on Financial Markets, a team of watch dogs led by Treasury Secretary Janet Yellen, raised concerns that stablecoins are too large and often used to facilitate illegal transactions.

Still, David Marcus believes Facebook can address many of the regulators’ concerns. He says that using a stablecoin backed one-to-one in cash reserves provides stronger consumer protection and quicker access to funds than traditional bank accounts. Marcus says it’s also a misconception that digital assets are anonymous, and when properly configured, digital wallets put customer due diligence at the heart of the approach.

Also, it doesn’t hurt that tech giant is launching Novi with a mission to serve people without bank accounts. In fact, Facebook says it doesn’t initially collect any person-to-person payments (including cross-border) and currently has no plan to monetize Novi.

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

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