In our latest Economic Equality blog post, we highlight often astonishing inequality findings in the Fed’s new survey of American economic well-being. However, the survey also has interesting financial insights, among them that only seven percent of surveyed Americans had difficulty accessing funds in an online bank account in 2018. Take away the respondents who couldn’t get their money because they forgot their password, dropped their phones down the drain, or were accessing someone else’s account they thought had their money and inaccessibility likely drops to a rounding error. This record of operational resilience is impressive, especially in comparison to the U.K. and other nations in which banks go on- and off-line like traffic lights. It’s thus easy to infer from this formidable statistic that “FaceCoin” – Facebooks rumored payment service for its 2.4 billion users – will come and go as fast as the latest buzzed-about shoes on Instagram. That would be a mistake – Facebook has billions to dedicate to its payment product, stiff regulatory challenges to its advertising revenue stream, and a wide-open field even in what seems to be a tightly-regulated payment market. Before this goes too far it’s important to remember that the frontline in the bank-versus big-tech battle is manned by vulnerable households at grave risk even if only a few hundred dollars goes missing.
As our recent assessment of big-tech inequality implications details, payment processing is a pretty straightforward business despite awesome operational infrastructure. Payment services work when a payor hands over his or her money to an agent who then ensures that the designated payee gets the money minus a cut somewhere along the lines of a tiny sum that compensates the agent and processor for their infrastructure costs. This is a very profitable business – $2.9 trillion at last count – but these profits are volume-based and depend at every moment on effective, seamless, and trustworthy execution.
Customers who depend on their bank to handle payment processing may be “sticky” because of the obstacles to transferring their accounts, but they’re not in bondage – that’s why banks are as reliable as the Fed’s data demonstrate. Remittance-service customers and consumers paying a friend for a few drinks at the bar are a different customer base clearly open to alternative payment models, but they also lack any commitment to Venmo or other alternatives and often keep their real money under the big mattress provided by an insured bank account. Even low-income consumers with very small-dollar transactions have options, not the least of which is executed via the cash in their wallets.
Facebook is thus already challenged because it is trying to replace a virtually frictionless payment system with a new, untested model linked to all sorts of other ventures and profit sources known and unknown. But, business risk is its worry. Where does the risk come for consumers who might be willing to give FaceCoin a toss?
Back to the basic point of payments: ensuring that the money going in one end comes out where it’s supposed to on the other end. Facebook’s challenge here is comparable to that of other tech-platform companies when they try their hand at finance. It’s one thing if an AI-generated ad targets someone who hates the stuff on offer. It may not even be all that bad if a tech-platform company uses personally-identifiable information to profit itself in undisclosed ways – it depends on what’s on offer and how the company profits. It’s way and real bad, though, for a consumer – especially one among the 39 percent of Americans with no more than $400 to lose – if even $25 meant for one person goes missing.
It’s hard to know if Facebook recognizes the paradigm shift that comes with offering financial services instead of targeted advertising. However, someone knows – why else would the OCC contemplate allowing national banks to provide custody services for crypto-asset companies? Why too would Google ask the Federal Reserve to authorize a new discount-window facility for nonbank payment-service providers? Indeed, why would a tech-platform coalition argue so hard for direct access to faster payments via the Fed? Consumers on tech-platform sites won’t notice any difference if a payment is processed through a bank or via Amazon, but Amazon sure will notice the difference if it no longer has to pay interchange fees. The payment system now may be frictionless, but the bank accounts, debit and credit cards, and other payment instruments now include lots of delays, fees, and access barriers that make them fertile field for huge companies already handling billions in transactions every day.
Are there no financial-inclusion benefits to big-tech payment services were they to run roughshod over bank-centric offerings? If the U.S. faster-payment system doesn’t quickly pick up speed, someone will clearly develop an alternative with a meaningful value proposition on offer to payors and their payees. However, if this value prop isn’t backed up by the resources and infrastructure necessary to ensure payment finality even under acute liquidity or operational stress from the start, then there are real risks to every vulnerable consumer. If these alternative payment services ramp up as major providers before a real-world stress test, then payment-system interruptions would also have systemic implications.
It’s clear why Facebook and other tech-platform companies see profit in payments. It’s less clear if the U.S. has a coherent understanding of payment-system risk, the unique role of the central bank as a payment-system operator or owner, what happens to banks in a nonbank-heavy payment system, and the consequences of payment-system black-outs. The still-nascent U.S. faster-payment system has taken years of ponderous, inconclusive taskforce meetings at which the Fed sought to resolve everyone’s interests to its own liking. It may well take FaceCoin to give the comeuppance this lugubrious process deserves, but this kind of progress comes at too high a price.