Facebook revealed this week that it is ready to launch its Novi digital wallet. Running on the Diem blockchain digital currency system and leveraging Facebook’s user base, the social network’s head of financial services, David Marcus, claims that Novi will disrupt the payments sector by offering free consumer payments and cheaper merchant payments to businesses. But it remains to be seen whether Facebook will be able to avoid the regulatory opposition that curtailed its original foray into digital currency, Libra.
“We’re a challenger in the payments industry, and we will offer free person-to-person payments domestically and internationally for people using the Novi wallet,” Marcus wrote in a Medium blog post announcing Novi. “We trust that people will prefer a service that is cost-free and more convenient to ones that are significantly more expensive and not consumer-centric. Once we have a meaningful customer base, we can offer cheaper merchant payments to businesses around the world and still make a profit margin on merchant services.”
Tech Monitor spoke to experts who explained why Novi is different from Libra and whether this gives it an increased chance of success.
Facebook Novi: another digital payment solution in a crowded market?
Digital wallets allow users to hold digital currency and make payments. Facebook’s position as the biggest social network worldwide, with roughly 2.89 billion active users, could make Novi a useful additional revenue stream for the company, says Nick Maynard, lead analyst at Juniper Research. However, he adds, existing local money transfer solutions, including banking apps and other digital wallets, mean that Novi will face stiff competition and will likely be expensive to roll out and grow its user base.
“It would mean that Facebook diversifies its revenue streams, which would be of obvious benefit to itself, and it could serve as a model for other Big Techs to follow,” says Maynard.
Despite Marcus's optimism about Novi's possible launch, Facebook's previous failure with Libra suggests that the digital wallet might not be as successful as the executive claims, says lead payments analyst at GlobalData Samuel Murrant.
"It’s an interesting play from a company that has long tried (and failed) to break into and disrupt the payments industry, but I am not convinced that this launch will be the one to change its fortunes here, even with the industry veterans it has behind it," says Murrant, who also doubts that Facebook will be able to leverage Novi to credibly threaten central banks in the implementation of digital currencies. "It simply won’t be allowed to operate in a way that could threaten nations’ monetary policies in that way from a regulatory standpoint, having already faced major setbacks in that regard."
Maynard adds that a scenario where Big Tech and central banks are in opposition to each other is also improbable: “A Big Tech versus central banks for rollouts looks relatively unlikely," he says. "Central banks need to regulate either way, so they will likely control the pace of digital currency rollouts and allow, in each market, what they are comfortable with.”
Regulatory concerns are still there for Novi
Diem, the blockchain-based payment system where the Novi wallet would run, is the successor of Libra – Facebook’s original blockchain and cryptocurrency project. Libra’s launch was halted in the face of outcry from central banks, which questioned the cryptocurrency’s regulatory framework and expressed concerns about its misuse for money laundering or terrorism financing. Other groups also raised privacy concerns and the threat of mass surveillance of Libra users by Facebook. In December 2020, Libra was renamed to Diem and scaled back as a plan to detach itself from Libra's failure and gain regulatory approval.
In his blog post, Marcus says that Novi will not launch on Diem until it obtains the necessary regulatory approvals and that it will engage with regulators, policymakers and experts in the development of the digital wallet: "We have stayed true to these commitments and engaged in constructive consultations with regulators and policymakers around the world,” Marcus wrote.
GlobalData's Murrant is sceptical that Novi will be able to meet regulatory requirements because it is tied to Diem. “It probably won’t be allowed to get off the ground by regulators – because it’s not just a money transfer company, it’s a corporate currency as well. To participate in Novi is to have your money printed by Facebook (and not a central bank),” Murrant says.
Simi Siwisa, member of the World Economic Forum (WEF) Global Future Council on Responsive Financial Systems and head of group public policy at Absa Bank agrees that despite Novi’s potential significant impact for global payments thanks to Facebook’s huge user base, it is unclear how the social network will address key regulator concerns around money laundering and terror financing.
“The success of Facebook products, especially WhatsApp, has been the relative ease of use and accessibility. The same qualities mean that introducing payments on those platforms presents a glaring risk,” explains Siwisa. “The expectation is that Facebook will invest in improving KYC [Know Your Customer, anti-money laundering regulations which financial institutions have to adhere to] and onboarding processes to address these glaring risks. Related to this, it would need to ensure protection of consumers and recourse for victims of fraud, which might be easier to facilitate on Novi and Facebook platforms.”
Siwisa adds that Libra’s experience with regulators might determine the success or the failure of Novi. But compared to Libra, she says, Novi’s scaled-down approach to seek regulatory approval in niche markets suggests that Facebook has understood its vulnerability and importance of addressing regulatory concerns upfront.
Siwisa mentions the concerns raised around a broad-based adoption of cryptocurrencies that would invariably weaken the ability of central banks to conduct monetary policy, including emerging markets that have capital account management policies that could be impacted by Novi and other digital currencies.
“How regulators respond to competition issues will shape the future of finance,” says Siwisa. “Additionally, will regulators handle Novi as a bank or will they decide to lessen regulatory hurdles for incumbent banks in some areas to facilitate an even landscape for financial services? The financial stability impact of Big Tech across many markets could be significant.”
Cristina Lago is associate editor of Tech Monitor.