For the financial services industry, Facebook’s new cryptocurrency, Libra, is yet another warning that digital technology is chipping away at the foundation of traditional business models.
Given the proposition that crypto currencies can supplant sovereign money, bankers and consumer fintech companies are backed into a corner. Regulated institutions, at least, are incentivized to side with central banks who supply credit and liquidity, and with regulators who grant their operating licenses.
Over in Menlo Park, the social media titan has created the antithesis of 19th-Century banking and currency markets by pairing its crypto currency with an operating co-op dubbed Calabria. Under this new non-sovereign paradigm, Facebook suggests that private sector interests can do the job more efficiently and democratically.
If they were reading the wires on June 18th, some bankers might have choked on the Libra news. Among them, the old-school capitalists, still tarnished by the financial crisis, would have asked how Facebook, the world’s most vilified and discredited consumer brand, can credibly claim to author this new chapter of global finance.
Facebook’s answer: a media blitz that turned aside current controversies, including the company’s damaged credibility, and presented a set of reasoned, if untested, solutions. Facebook fended off its key public trust issues by recruiting a long list of respected brand names, as well as non-profits and public policy groups, to serve as founding members of Calabria. With Calabria, Facebook effectively inoculated Libra from Facebook’s reputation for anti-competitive practices. As an additional potential benefit, Calabria’s membership may convey to some observers the members’ implicit endorsement of Facebook’s leadership.
To be sure, the launch was not entirely successful. Within hours, leaders on Capitol Hill issued condemnations, called for public hearings, and demanded Facebook halt work on Libra, pending review.
In addition, the announcement drew attention to non-crypto digital competitors around the world, such as Alibaba’s Alipay and Tencent’s WeChatPay, which have dominant shares of China’s $23 billion mobile payment market.
Digital Revenues and Risks
Banks have not joined Calabria yet, but they have been following in Facebook’s footsteps for several years, collecting, aggregating and selling consumer data. The “data monetization” strategies now represent a multi-billion-dollar opportunity for consumer finance companies. According to one study, the growth rate is 35% globally, with margins as high as 85%. These revenues are critical to the survival of financial services models given that experts say technology will eventually drive fees for virtually every financial product and service to zero.
Still, the challenge for incumbent financial institutions is as much about disclosure and customer transparency practices as deploying data algorithms across their enterprises. Notwithstanding the existential threat of digital and crypto, bankers cannot afford to ignore the lesson that Facebook teaches about public opinion. In today’s world, consumers and their advocates believe that profiting from socially-shared, non-commercial information is unacceptable.
Thus, the new revenue streams flowing into financial services, could be as much a curse as a blessing. As consumer finance companies roll out instant loan approvals, AI-assisted savings plans and hands-free payment apps, they should be prepared to handle their own version of Facebook/Cambridge Analytica.
Confronting the Questions
How should leaders respond to privacy concerns? Can financial services effectively manage data risks? Will regulatory and compliance costs outweigh the competitive and operating benefits of digital delivery? Indeed, do digital businesses and operating systems powered by consumer data fundamentally conflict with legacy brands built on trust and safety?
As senior management looks for answers, they will likely save a seat at the conference table for one or two communications professionals. Public affairs counselors who have watched the social media backlash and survived the financial crisis will recommend strategies that address broad categories of public opinion risk.
Hacking Crisis Management
The most imminent and likely risk facing all data repositories is theft. Institutions unable to keep their records out of the hands of criminals call their basic integrity into question. Indeed, a 2017 survey by The Depository Trust Clearing Corporation suggests that even the best practices and protections may not work. Bankers responding to DTCC ranked cyber risk as the number one systemic risk. In a 2018 study, IBM found that cleaning up after a data breach cost the average bank $3.86 million, up 6.4 percent in a single year.
Companies hit by hacks must respond quickly and decisively. Non-disclosure is not an option. Under GDPR, European operations must report data losses within 72 hours. Thus, the most basic risk management plan must enable communications officers to verify the accuracy of information and disseminate it to multiple audiences rapidly, repeatedly, and consistently.
Regulatory Policy Initiatives
Managing a crisis isn’t as complex a communications challenge for big banks and finance companies as rebuilding trust. Industry leaders can, however, begin to restore credibility – and influence – with public officials and consumer advocates by successfully engaging in public policy initiatives. Some of these collective efforts are already underway. The Financial Services Sector Coordinating Council, for example, was established in 2002 to protect IT infrastructure. The group developed recommended guidelines for industry cybersecurity risk management practices.
Companies serious about adopting best practices in disclosure and compliance, should study their own privacy policies. Much of the fine print is out of date, inadequate and needs a thorough re-write. According to one academic study, just over 50% of U.S. digital lenders’ policies even bother to define what type of information they collect. The numbers are even lower for disclosing the time limits placed on retaining personal data, even after the consumer is no longer a customer. Moreover, policies are notoriously difficult to read. After reviewing 150 examples across industries, The New York Times concluded that they were “incomprehensible” and took nearly 20 minutes to read.
CEO Thought Leadership
Where companies roll out messages on behalf of consumer privacy, there is no substitute for communications led by the CEO. Apple CEO Tim Cook has carved out a distinctive role for the Apple brand on the issue. Although currently a target of anti-trust investigators, Apple is fighting back by taking the privacy high ground with product innovation, marketing, and evangelical advocacy. Unfortunately for financial services incumbents, no Tim Cook counterpart has come forward.
Data and Financial Inclusion
Consumer advocacy, privacy protection initiatives and regulatory consensus-building may not win hearts and minds. Data applications in the hands of banks may lead to on-going, perhaps increasingly bitter public opposition. Notwithstanding Libra’s communications challenges, it’s helpful to circle back for another look at Facebook’s communications strategy.
Without directly linking Libra to a sustainability cause, Facebook nevertheless aligned its crypto currency to a progressive social aspiration: global economic development and equality. Near the top of its press release, Facebook noted: “…For many people around the world, even basic financial services are still out of reach: almost half of the adults in the world don’t have an active bank account…”
This financial inclusion benefit has its roots in microfinance and remains a key aim of many crypto and blockchain advocates. Increasingly, research and commercial practice demonstrates the successful application of “cash-flow data,” from utility bills to rent payments. These data sets could change the calculus of lending to borrowers who lack conventional credit histories. In a comment letter to the Senate Banking Committee last year, FinRegLab, a non-profit financial research group said: “For the 30-40 million (U.S. citizens) who are considered thin- or no-file applicants for credit, data and technology may enable banks and non-banks to perform more effective and efficient evaluations of credit risk.”
Banking and fintech leaders can and should point to promising digital innovations that have enabled financial inclusion in developing countries and among underserved populations in the developed world. Unfortunately, the financial services industry has mostly failed to highlight the contributions of financial inclusion innovations. Instead, the promotional work has been left to global public policy makers and academics.
One such public service initiative was adopted by the World Bank in 2015 which estimated the global “underbanked” population at 1.7 billion. With none of the fanfare that Facebook created, the World Bank announced Universal Financial Access 2020, a plan to connect one billion people with a transaction account.
The work on campuses may have had an even greater influence. In 2016, professors from Georgetown University and MIT published among the most widely-cited studies on the Kenya-based mobile payment venture, MPesa. This mobile payment business established in 2007 by Vodafone is now the largest in both Kenya and Tanzania, with operations in elsewhere in Northern Africa, South Africa and Eastern Europe. Calling attention to the success of MPesa, the Georgetown/MIT study documented that MPesa has “…increased per capita consumption levels and lifted 194,000 households, or 2% of Kenyan households, out of poverty.”
Other remarkable financial inclusion solutions include insurance products to the financially disenfranchised. The Center for Financial Inclusion, a division of microfinance pioneer Accion, has reported on Blue Marble Microinsurance in Zimbabwe where “…weather satellite systems provide data that allows [the company] to offer parametric insurance with automatic payments in the event of drought.”
The case for data as a driver of financial inclusion is persuasive. Bank and fintech brands that articulate benefits like these, while confronting public concerns with more transparency, stand a good chance of succeeding the in the digital age. In the past, legacy financial information products, from economic forecasts to marketplace pricing information, to sell-side analyst reports, have shown the industry can responsibly commercialize public data. In order to win the support of new audiences and digital age customers, fintech and banking leaders need to define and rededicate themselves to acceptable standards of protecting and optimizing private assets.