8 Reasons Facebook’s Libra Threatens Credit Unions

On June 18, Facebook announced plans in 2020 to launch Libra, a new cryptocurrency, and Calibra, a digital wallet. It’s tempting to ignore this news because previous wide-eyed speculation over the effect digital wallets, Bitcoin and blockchain would have on credit unions hasn’t come to pass.

But Libra is different. Here are eight reasons it could permanently disrupt the credit union community.

1. It will be made immediately available to 2.7 billion people. That’s 35% of the world population that currently uses Facebook and its messaging subsidiary, WhatsApp. Here in the U.S., 170 million people use Facebook (more than half of the population) and 68 million use WhatsApp. I can’t think of another brand that serves more than half of the population and more than one-third of the world.

2. It’s not just the sheer numbers of people Facebook represents, it’s their data. Facebook knows a dangerous amount of information about its customers, including the names of their family members and friends, their lifestyle choices, their political and personal preferences, and what pushes their buttons emotionally. When it comes to big data, this is the cream of the crop.

3. Libra will operate independently of the central banks and does not currently require approval from Congress or oversight by any banking regulators. This doesn’t mean Congress can’t attempt to regulate it, and ironically, elected officials have already used social media to declare their intent to get involved. But let’s be realistic: Given the inability of Congress to move forward on anything that requires a majority consensus, and the potential demand among consumers, it seems unlikely Congress will actually do anything about it before the damage to traditional financial services has already been done.

4. Libra will be secured through a basket of international currencies, such as the U.S. dollar, Euro and Yen. It would also require government ID to access, reducing the likelihood it would be used for criminal activity. This is a significant improvement over earlier cryptocurrencies like Bitcoin, and the added stability and legal checks will further decrease the odds that Congress will take action.

5. Libra is already supported by 27 key technology partners, which have invested $10 million each. They include payment processors Visa, Mastercard, PayPal, Stripe and PayU, as well as digital disruptors like Uber, Spotify and eBay. Partners also include digital wallet providers that serve the unbanked and underbanked, a.k.a. those of modest means. By the time Libra launches next year, Facebook predicts it will have 100 partners that could pave the way for quick and widespread adoption.

6. The initial launch will feature a digital wallet that will allow people to seamlessly transfer funds to anyone on the planet and/or easily pay for any product or service they choose, without fees. It will kill what’s left of the remittance business that survived Dodd-Frank. And even though Visa and Mastercard are on board, Libra would allow consumers to shop without using a debit or credit card. That’s not just an option, it’s the plan, and could take a huge chunk out of your interchange income.

7. Libra doesn’t aim to be just another payment alternative. It wants to democratize participation in the global digital economy for people and small businesses, regardless of income. It wants to upend the traditional financial services market and global banking systems. If you think that’s unlikely, you probably don’t appreciate how Facebook has transformed the way people interact and communicate, the way political candidates (and foreign nations) influence public opinion, and how businesses market themselves, engage with customers and conduct transactions. Add in a payment platform and cryptocurrency, and this is a disruption powder keg waiting to explode.

8. Adoption by consumers will drain credit unions and all financial institutions of deposits. This could happen quickly, given the high profiles of Facebook and its partners. I tend to agree that banks, particularly big banks, will see more decline in their deposits than credit unions. But this is a zero sum game for all financial institutions. If deposits shrink, assets must shrink accordingly or be replaced with another source of funding. If deposits flow out of JP Morgan, for example, they will “pay-up” as needed to replace the outflow. As rates rise for deposits in the big banks, eventually credit unions will be affected. The NCUA has historically made it relatively difficult for credit unions to access secondary funding sources such as non-member deposits, secondary capital and the Federal Home Loan Bank, but a deposit drain of this magnitude could force the agency to rethink its approach.

If you doubt the impact Libra could have on credit unions, you probably aren’t old enough to remember how money market mutual funds (MMFs) destroyed the S&L industry. They were introduced in the 1970s as an alternative to deposit accounts. Nobody thought they posed a risk to financial institutions, but that’s because they underestimated the market appeal of a relatively safe account that wasn’t subjected to Reg Q, which at the time prohibited interest paid on checking accounts and capped interest on other deposit accounts to just 5.25%. At year-end 1977, MMFs claimed only $4 billion in total assets. Then in 1978, interest rates rose rapidly, with the Fed Funds rate reaching 20% in 1979, which sounds mind-blowing today. With Reg Q limiting federally-insured deposit accounts to just 5.25% interest, assets drained from financial institutions, and by Jan. 1, 1980, MMFs had $25 billion in assets. Balances now exceed $3 trillion.

Yes, times and conditions are different, but this regulatory loophole product is a perfect example of how quickly and profoundly marketplaces can change, especially when established players make incorrect assumptions about their value and consumer behavior. From my perspective, Libra will be a larger market disruptor than MMFs.

I personally think a 2020 launch sounds a bit ambitious, especially given Facebook’s track record of previous launches and privacy issues, as well as the distractions of a big election year. But make no mistake, Silicon Valley gets things done, and don’t think for a minute Amazon and Google aren’t already brainstorming how to duplicate and improve upon this idea.

This is a watershed event and can’t be ignored. At a minimum, credit unions must put cautionary funding plans into place as they finalize their budgets and plans for 2020 and beyond.

Robert Colvin is President & Chief Strategist for CU Capital Market Solutions. He can be reached at 913-402-2616 or rcolvin@cucmsllc.com.