The reality here is that if you want to build a service that helps connect everyone in the world, then there are a lot of people who can’t afford to pay. And therefore, as with a lot of media, having an advertising-supported model is the only rational model that can support building this service to reach people. That doesn’t mean that we’re not primarily focused on serving people. I make all of our decisions based on what’s going to matter to our community… But if you want to build a service which is not just serving rich people, then you need to have something that people can afford.
Stunning though it is, this statement is more nuanced than one from a fellow executive that recently surfaced in the press. The maligned one now removed from the public record says essentially that social connection is so powerful a public good that a few dead bodies are an incidental cost. Mr. Zuckerberg – I suppose I should call him Mark given the current ethos – dispenses with the dead bodies, but his point is essentially the same: connecting people is so gosh-darn good that Facebook must deliver this good at low to no cost to billions of users. Connecting people isn’t, though, good enough to induce Facebook to do it for free, rhetoric notwithstanding. Facebook loves its mission, but it hit the “like” button a lot as it built its advertising and data-sale business model and nothing in its latest patch of do-better blandishments changes this fundamental equation. Not all platform companies share Facebook’s business model – indeed Apple’s Tim Cook expressly renounced it. However, Facebook is so powerful on its own and platform companies are so omnipresent that it’s critical now to consider what applying its business model to retail finance would do to financial-market access, integrity, and stability.
Facebook isn’t the first company to cloak itself in the public good. Some believed their own self-generated myths more than others, but many companies have used it to considerable effect. Coca-Cola once said drinking Coke – a beverage with at best a questionable link to public health – was a way to enhance world peace and understanding – connectedness, come to think of it. Remember the “American dream of homeownership” ads that draped the flag over Fannie and Freddie as they went on first to riches and then ruin? Google “does no evil,” but …? Is social connectivity really a primordial force for good or might food, shelter, and even household wealth above sheer sustenance be more vital to well-being?
Leaving aside Facebook’s obvious insularity and seeming insouciance to emerging risk, how would Facebook’s indirect and invisible pricing methodology work if applied to retail finance? Stripped to its core from a social-welfare perspective, retail financial services consist of financial intermediation – gathering deposits and making loans. I’m not the only one who says so – the long-established view of public good here means that deposits are backed by FDIC insurance, loans are bolstered with Fed liquidity, and banks are regulated in hopes of ensuring that these taxpayer benefits genuinely adhere to the public good, not to the shareholder’s purse.
Banks also pay for the privilege of offering public goods and, at least so far, price explicitly – interest rates and fees – as they compete to offer essentially the same services backed by the same federal promises. Banks of course use information gathered along the way not just for internal-control or underwriting purposes, but also for profit. But, Wells’ cross-selling scandal notwithstanding, a lot of rules limit the extent to which banks can tie one product to another, package them with other products, or convey information on their customers to those who might pay dearly for it. The social-policy reason behind all of these rules is that the power of acting on behalf of the public good can convey the omnipotence through which market incentives and personal choices can be altered to favor the provider, not the public.
That all of these data are valuable is evident in the battle now over whether data aggregators can just go in and get it. That Facebook or another platform company would do far more with big data on all of its financial customers is certain – not only does profit depend on using these data to the firm’s advantage, but corporate culture also blesses deep dives into rich troves of data most companies don’t have and some would scruple to build.
Facebook just yesterday said it will no longer provide certain personal information to third parties, but how will it use it itself? If it simply can’t charge a fee to send data along, it well could promise advertisers that it will match the product to the person internally and take fees for making a match. Would Facebook then steer me to financial products it thinks might suit my political proclivities – a bank that eschews guns or an asset manager promising something public spirited? Would I be taking undisclosed risks and receiving sub-par returns doing financial business with someone I “like?” How would all the personal data Facebook has about my age, race, neighborhood, and disability factor into credit underwriting and product pricing? Could anyone ever tell given the opacity of big-data methodology?
And, what might Facebook do with information on to whom I send money via check or some other payment instrument? Think of what it’s done with “likes” and then posit what could be done with knowledge about hard cash.
Finance in platform companies with other earnings priorities poses the “natural monopoly” risks about which global regulators rightly worry. Leaving aside Facebook, Amazon with all these data and a financial-product suite could quickly come to set prices for merchandise based on how much it knows about your finances. It could for example sell me only the shoes it thinks I could manage to pay for based on what it knows about my savings or remaining lines of credit, not the best-value shoes on offer as I might define it for myself after reviewing as many options as one evening looking at the computer will bear.
The entire U.S. structure of financial policy is premised on separating banking and commerce due to ingrained fears about these types of conflicts of interest, fears often realized when one looks into just how installment lending for cars or appliances is set. Do we really mean to abolish this precept and its putative protections without even thinking hard about it? I think the banking/commerce divide is anachronistic, but that’s just me and even accepting that premise doesn’t then determine how commingled risks – and there are a lot of them – are best mitigated.